The shares of iron ore mining giants BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO) will be on watch today after the iron ore price tumbled 6.5% to $US72.68 a metric tonne overnight, according to the Metal Bulletin.
On Friday iron ore finished the week at US$79.81 a tonne, having risen an incredible 22% in November alone. But since then the metal has fallen almost 9% as the market gets realistic on demand.
Following Donald Trump's victory at the U.S. election, the iron ore price rocketed as traders speculated that the President-elect's infrastructure plans would cause demand to surge.
This was great news for miners and especially Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI). In the last five trading sessions these two junior miners have seen their shares jump by 85% and 52%, respectively.
But as we pointed out recently, the rally appears to be unsustainable. Reports in the Fairfax Media reveal that analysts from both UBS and Morgan Stanley believe that producers have a lack of confidence in current iron ore price levels and expect them to fall.
Their view has been based on the fact that current sky-high iron ore prices have not been enough to incentivise many producers to restart production.
If the producers aren't bullish on iron ore, then I'm certainly not going to be. I still believe iron ore prices are set for a steep drop in the next few months as more supply from Australia and Brazil hits the market.
In fact, I wouldn't be surprised to see the price drop down to US$50 a tonne by the middle of next year.
Whilst many of Australia's low-cost miners such as Fortescue Metals will still remain extremely profitable at US$50 a tonne, the bumper profit growth that has been baked into the current share prices may not eventuate.
In light of this I feel that now might be a great time to move out of iron ore and into other areas of the market.
