Australia's iron ore miners have enjoyed a miraculous recovery in recent weeks, and that trend looks set to continue today after the commodity enjoyed its eighth consecutive session in the black-zone overnight, edging closer to the US$60 a tonne mark.
According to figures provided by the Metal Bulletin Ltd, iron ore rose another US$1.28 or 2.2% to be trading at US$59.09, which is its highest level since early March. That also represents a nearly 27% improvement on the 10-year low price of US$46.70 it hit earlier in the month at a time where some pundits believed the commodity was destined to fall below US$40.
While it is likely that the commodity's recent rally can be partially attributed to shorters (investors who 'short' a commodity hope to profit as it falls in value) exiting their positions, it can also be linked with a rising oil price (which makes iron ore production more expensive, possibly forcing high-cost miners out of the market), as well as stimulus from China which could spur demand growth.
However, it seems that the major catalyst behind the commodity's sudden resurgence is news that mining heavyweight BHP Billiton Limited (ASX: BHP) will scale back its expansion plans, indicating an easing of supply-side pressure in the near future.
What this means for YOU
The rallying iron ore price has come as a huge relief for the nation's miners, many of which have surged in price as a result. Fortescue Metals Group Limited (ASX: FMG), for instance, jumped 16.3% yesterday (up 33% over the last week) while BC Iron Limited (ASX: BCI) also rose 26.2% (up 93% over the week).
As can be seen in the chart below, Rio Tinto Limited (ASX: RIO), Mount Gibson Iron Limited (ASX: MGX) and BHP Billiton have also rallied strongly over the last week.
Source: Google Finance
Given the gains recognised in the iron ore sector recently, some investors might feel compelled to gain exposure by buying shares in the high-cost miners. Indeed, that could generate some fantastic gains if the iron ore rebound continues, but it could also result in painful losses should the price suddenly reverse – as it has done so many times over the last 18 months, catching countless investors off-guard.
Although recent developments in the sector are certainly encouraging for investors, the underlying facts remain true: the global market is being flooded with additional supplies from the world's biggest miners at a time where demand is falling. While factors can change in the short-term, that trend looks set-in-stone in the long-run, and Foolish (capital 'F') investors would be wise to steer clear altogether.
