Iron ore prices have risen strongly since hitting a 10-year low of US$46.70 a tonne earlier this month, but there is reason to believe the commodity's recent rally could be short lived.
According to data provided by the Metal Bulletin, the commodity rallied to US$51.57 on Monday but returned to the red-zone overnight, falling 1% to US$51.04 a tonne. While its recent strength has gotten some investors and analysts questioning whether iron ore had been sold down too heavily, others remain cautious of the massive supply and demand imbalance across the globe.
As a perfect example, The Australian Financial Review recently reported that Commonwealth Treasurer Joe Hockey had considered the impact on the Federal Budget should iron ore fall to US$35 a tonne this year. The AFR also showed that Citigroup was similarly bearish on the commodity, forecasting an average price of just US$37 for the remainder of the year.
While some investors might find it difficult to imagine the commodity plunging another 30% from today's level before the end of the year, it is certainly a possibility. At the same time as Chinese demand for iron ore is diminishing, the world's largest producers are ramping up their production rates.
BHP Billiton Limited (ASX: BHP), for instance, has today increased its full-year production guidance by five million tonnes (Mt) to 230Mt, while Rio Tinto Limited (ASX: RIO) yesterday confirmed its guidance of 350 million tonnes.
Given their low cost operations and higher levels of diversification, BHP and Rio Tinto are both positioned to ride out the latest commodities storm, although they too could come under pressure should iron ore fall to those unprecedented levels expected by Mr. Hockey and Citi.
On the other hand, Australia's junior miners are by no means in the clear. With iron ore hovering around the US$51 a tonne mark, it's likely that most of them are already operating at a loss. Atlas Iron Limited (ASX: AGO) has already suspended production and rivals such as Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI) mightn't be too far behind it.
While some investors will see the recent strength in iron ore prices as the beginning of a major rebound, long-term investors need to recognise that there is not much chance of such a rebound being sustained. As such, you would be well advised to steer clear altogether and put your hard-earned money towards some other, much safer, investment opportunities.
