Iron ore slammed 4%: What every investor needs to know

With strong headwinds forecast, not even BHP Billiton Limited (ASX:BHP) or Rio Tinto Limited (ASX:RIO) are looking particularly compelling at today's prices.

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The relief rally enjoyed by iron ore bulls proved to be short lived with the commodity enduring its worst fall in weeks during Friday's session.

The commodity has enjoyed a remarkable few weeks which saw it climb from a decade low of around US$44 a tonne to a high of more than US$55 a tonne last week – a climb of 25% to meet the definition of an official bull market.

While its sudden sharp rise had some investors and analysts scratching their heads, few will be surprised to see it fall a little over 4% during Friday's session to just US$53.41 a tonne, according to data provided by the Metal Bulletin Ltd.

The loss can likely be attributed to weakness experienced by China's stock market which recorded a massive 15% decline during July. The Shanghai stock exchange fell a little over 1.1% on Friday with investors around the globe questioning whether the losses can be brought under control, and whether they will start to spill over into the real economy.

At the same time, investors are also worried about a potential slowdown in steel production in the world's second-largest economy as the authorities crackdown on air pollution. As demand slows down, the world's largest producers continue to increase their output which could have a majorly detrimental effect on the commodity's price in the long-term.

With some analysts forecasting the iron ore price to slip below US$40 a tonne before the end of the year, it is clear that the sector remains an extremely risky prospect for investors whereby the risk outweighs the potential reward. That especially applies to the nation's high-cost miners such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX), as well as those with mountains of debt such as Fortescue Metals Group Limited (ASX: FMG).

Even the margins and profits of the industry titans, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), are under threat with neither looking particularly compelling at today's prices. With further falls anticipated, it seems investors would be wise to simply avoid the sector altogether and focus on some of the market's other, more lucrative prospects instead.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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