Much to the delight of BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG), the rocketing iron ore price shows no sign of slowing.
According to Metal Bulletin the benchmark 62% fines index finished last week at US$79.61 a tonne, around 13% higher than last Monday's close price.
The latest gain coincides with Chinese steel prices hitting a 30-month high after Reuters reported that China had cut 88 million tonnes of steel capacity this year. This was almost double its initial target to tackle overcapacity.
Whilst that is likely to be good news for steel prices, it shouldn't necessarily be for iron ore. With China reducing its steel output, it is also lowering its demand for iron ore.
Despite this Chinese speculators continue to drive the iron ore price artificially higher. But without the demand to back up the surging prices, I expect iron ore will fall sharply in the coming months when the bubble bursts.
In the short term iron ore could well move beyond US$80 a tonne, or perhaps even as high as US$90 a tonne. But the higher it gets the riskier it becomes.
So whilst it may be tempting to buy shares in Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI), and Rio Tinto Limited (ASX: RIO) on the back of these rising prices, I feel investors would be better off avoiding them.
If the iron ore bubble does burst, then these shares will be in the firing line. For that reason I believe investors will be better served with investments in the healthcare or information technology sector.
