The iron ore price has held up surprisingly well through the market’s recent bout of volatility, but it’s no certainty to remain that way.
According to The Australian, the commodity’s price has now fallen to its lowest level in two months. It’s fetching just US$52.60, based on data from The Metal Bulletin, after falling more than 5% during a four-session losing streak.
Indeed, the commodity’s price is largely dependent on the strength of the Chinese economy. China accounts for the vast majority of demand for the commodity, which is a key ingredient used to make steel. The iron ore price soared to a high of roughly US$185 a tonne in 2011, but has since collapsed as Chinese demand growth begun to wane.
Fresh data is due for release today which will reveal the strength of the world’s second-largest economy during the third quarter. Economists are forecasting the slowest growth since the depths of the Global Financial Crisis, with GDP growth tipped to be just under 7%. This could result in fresh weakness in the iron ore price.
This presents investors with something of a dilemma. On the one hand, economists have assessed the commodity’s recent performance and declared that the commodity rout may have finally found a floor.
This meant investors piled into iron ore and oil stocks as a result, hoping to catch what could have been a significant turnaround. This saw a sharp spike in the shares of companies like BHP Billiton Limited, Rio Tinto Limited and Fortescue Metals Group Limited , with investors hoping for the good times to continue.
On the other hand, iron ore is still as reliant on Chinese demand as it has been in recent years. This, in turn, becomes a key risk for the commodity’s price (and the miners who produce it), which could collapse if Chinese growth continues to diminish.
Although the idea of making a quick profit from the resources sector may be tempting, it is also incredibly risky which could just as likely result in significant losses. Investors would be wise to give it a miss and focus on some of the market’s other, more compelling opportunities.