Despite the price of iron ore – a key steelmaking ingredient – plunging to just $US52.69 per tonne overnight, according to The Metal Bulletin, major miners have seen their share prices jump higher today.
But the upswing isn't likely to last long…
Over the past 12 months, shares in Australia's iron ore miners have been hammered.
Our biggest miners – Rio Tinto Limited (ASX: RIO), BHP Billion Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) – haven't been immune, despite their relatively low cost base.
Respectively, their share prices are down 10%, 15% and 63% over the past year. That compares to a positive 10% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
However, if we zoom out a bit, and look back over the past five years, the comparison gets even worse. The three majors are down 29%, 28% and 60%, respectively, versus a 21% return from the market.
Of course, they've fared better than their smaller counterparts (some of whom have already gone bust!) but if you think the current underperformance could simply be a cyclical swing, I urge you to think again.
One look at the following chart gives you an idea why now likely isn't the right time to buy shares in iron ore miners.
Source: Indexmundi.com
The chart, above, shows the price of iron ore over the past 30 years.
Supercharged by unprecedented demand from Chinese customers, Australian iron ore miners have enjoyed years of huge profit margins, thanks to relative undersupply and low costs.
China accounts for two-thirds of the world's consumption of iron ore.
However, China's spending on infrastructure is expected to wane in coming years as the country transitions to a more consumer-led economy.
Moreover, as Motley Fool Pro chief investment officer, Joe Magyer recently said, it is estimated there are enough empty apartments in China to house six years of urban migration (that is, movement from rural areas to the city).
"That's more than an entire year's worth of global iron ore demand going up in smoke," Joe recently wrote in an article on fool.com.au.
Worse still, despite the iron ore market already being in surplus by 30 million tonnes, investment bank UBS forecasts the surplus to grow by 600% between now and 2018 to more than 200 million tonnes per year!
Don't catch a falling knife
So despite seemingly cheap prices, investors are advised to steer clear of all iron ore miners, including the three major producers named above. There may come a time to buy shares in each of them but with a gloomy outlook, that time is not now. Buyer beware.
