What: Shares of iron ore and steel stocks dropped on Tuesday after Monday's iron ore price jump was explained away as a temporary phenomenon. Freeport McMoRan (NYSE:FCX) closed more than 12% lower, Cliffs Natural Resources (NYSE:CLF) ended down almost 21%, Vale S.A. (NYSE:VALE) dropped 14%, AK Steel (NYSE:AKS) was down more than 10%, and United States Steel (NYSE:X) dropped as much as 12% in trading before closing Tuesday down 9%.
So what: Platts IODEX iron ore index, which is a proxy for the spot price of iron ore, has popped more than 50% so far this year, and was up 20% on Monday alone. Signs of recovery from the fall doldrums seemed everywhere. Bullishness recently came as China set higher than expected growth targets, and a sharp rise in steel prices led to more demand for iron ore.
But analysts at Goldman Sachs and Commerzbank warned today that the rise in both steel and iron ore would be temporary. China is entering prime building season, and to get manufacturers to absorb start-up costs, the price of steel had to rise significantly in the short-term or plants would remain shut down. This spike in prices may give them reason to produce more steel, but it'll also increase supply in the market and eventually suppress prices once again. That's not a sustainable cycle, so the pop in prices lately may not actually translate to higher earnings throughout 2016.
Now what: The commodity cycle continues to go up and down, and this time it's working against iron ore and steel investors. This is still a highly competitive market with little profit to be had long-term. What manufacturers really need to see is high cost supply in both iron ore and steel move out of the market, but that's not happening as quickly as anyone had hoped.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources, Companhia Vale Ads, and Freeport-McMoRan Copper & Gold, Inc. Try any of our Foolish newsletter services free for 30 days. 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.