Mining services stocks soar as iron ore price jumps

Is this a good sign for construction and engineering companies in the resources sector?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published April 23, 2015 11:02 am AEST

Beleaguered iron ore miners have sprinted out of the blocks in early trading after the iron ore price jumped 5.9% overnight.

The Spot iron ore price hit US$54.04 per tonne after BHP Billiton Limited (ASX: BHP) announced plans to slow its rapid Pilbara iron ore expansion. A project to debottleneck the inner harbour at Port Hedland was deferred, as the giant miner revealed it had managed to get production costs below US$20 per tonne.

In early trading, the junior iron ore miners, including Arrium Ltd (ASX: ARI) and BC Iron Limited (ASX: BCI) were rocketing ahead, up 9.7% and 30.8% respectively.

The news was also good for struggling mining services companies, with NRW Holdings Limited (ASX: NWH), RCR Tomlinson Limited (ASX: RCR), Monadelphous Group Limited (ASX: MND) and AJ Lucas Group Ltd (ASX: AJL) all posting gains of more than 3%. A host of other construction and engineering companies are on in the green today too.

But is this just a short-term bounce or a longer-term trend?

Unfortunately for investors buying into miners or mining services, the rally is likely to be short-lived. While BHP may have slowed down its rate of expansion, there are still huge amounts of iron ore supply coming on stream now and in the near future. At the same time, demand for iron ore, the key steel-making ingredient is likely to slow.

I'm afraid today's jump appears to be a 'dead cat bounce', and we could easily see iron ore prices plunge back down as early as tonight.

For mining services, the outlook is even bleaker, with mining investment yet to hit rock bottom. That means contracts are drying up and available contracts come with much smaller margins.

Foolish investors would be wise to avoid both sectors for now.

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