Investors in Australia's embattled iron ore sector have been given a glimmer of hope following a two-day rally which has taken the commodity above the US$50 a tonne mark.
After having traded as low as US$47.08 in the past week (by which stage it had lost almost a quarter of its value in just five weeks), the commodity has since risen 7.9% to be worth US$50.78 a tonne, according to the Metal Bulletin. It rose 4% during last night's session alone.
The nation's largest miners are jumping as a result of the sharp rebound. Fortescue Metals Group Limited (ASX: FMG) for instance has risen 1.1%, while BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have lifted 1.6% and 1.8% respectively. However, the same can unfortunately not be said for Australia's junior miners.
High-cost miners such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) are both in desperate need of a rebound in iron ore prices, although it's expected that the rally will only be short lived. As such, the pair have retreated 5.2% and 5.1% today, respectively.
Although the idea that iron ore prices could continue to rise strongly might be enough to tempt you into buying the miners, the simple supply and demand economics suggest that such a rebound will not eventuate. At the same time as the world's largest miners are ramping up their production rates, global demand is waning rapidly, creating an enormous imbalance and ultimately forcing prices lower.
In fact, the Federal Government and Citigroup both expect the commodity to fall below US$40 a tonne before the end of the year, which could be enough to wipe the world's high-cost operators off the map. Investors would be advised to ignore the recent price movements and look to put your money to work elsewhere.
