Iron ore could be about to crash

Iron ore and steel futures sink overnight

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 March 24, 2016 9:09 am AEDT

The spot iron ore price fell for the second time overnight, losing 0.8% to US$57.87 a tonne, and follows a similar fall for the day before.

But iron ore futures on the Dalian Commodities Exchange fell by 4.8%, down 8.6% from the highs hit earlier this week, and steel (rebar futures) prices have also slumped on the Shanghai Commodities Exchange.

The decline of both futures contracts suggests the brief iron ore rally could be coming to a dramatic end.

We've mentioned this a few times – that the iron ore rally was most likely a result of temporary factors rather than a structural change in the market.

Those factors include:

A temporary surge in steel production (and iron ore stocking) before a series of rolling shut downs of steel mills in a major steel producing city, Tangshan, over the next six months. Those shut downs are to reduce levels of pollution during a Horticultural Expo
Brazilian iron ore giant Vale warning that up to 100 million tonnes of production was at risk due to outstanding environmental licences
Steel mills stocking up after the Chinese New Year in February
Steel prices rising on the hopes of renewed domestic demand in China

Taking those factors out, and both the supply and demand sides of the iron ore equation look weak. Steel demand and production is forecast to fall for a number of reasons, while production continues to ramp up globally, adding to the already oversupplied situation.

For higher cost producers, particularly smaller miners like BC Iron Limited (ASX: BCI), Arrium Ltd (ASX: ARI), Atlas Iron Limited (ASX: AGO), Gindalbie Metals Ltd (ASX: GBG), Mineral Resources Limited (ASX: MIN) and Mount Gibson Iron Limited (ASX: MGX), that's not good news.

A number of them have seen their share prices soar in the past month, but the upward trend could be about to reverse course.

Foolish takeaway

Investors gambling on higher iron ore prices are taking a big risk – with many analysts pointing to lower prices in the second half of this year, and there's no real reason to expect a major price recovery anytime soon.

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