by Jill Bhatia

Created on: May 31, 2009   Last Updated: June 04, 2009

Should You Invest Your Money in the Mining Industry?

Invest your money in something else. Now the mining industry is not the industry to invest money into. Although investing in commodity based companies seem great, be careful of a trap. Cyclical stocks are down when the economy is down and up when the economy is up and it is uncertain when a full recovery will take place. Stocks like these are up one day and down the next. On

April 20, 2009 the stock closed at $130.01. During the following weeks the closing value of the stock continued to increase, reaching $183.66 on May 5, 2009. Two days later the stock dropped to $166.20 and continued to decline until a few days later when it started to increase again. With this kind of uncertainty, it would be a mistake to invest your money into the mining industry at this time.

Customers who purchase steel are not buying as much steel as they used to when the economy was up and steel makers are being forced to lower their steel prices. As a result of this cut, steel makers want to lower their costs of purchasing iron ore and want to make a deal with the companies that produce it. The best example of this trend is a deal made this year between iron ore producer Rio Tinto, Ltd (RTP) and Nippon Steel Corporation (NISTY). Rio Tinto is a company based out of Australia who finds, mines, and processes mineral resources. Nippon Steel Corporation is a company based out of Japan that specializes in the production of steel. Nearly all of the materials needed for the production of steel in Japan must be imported. Therefore, companies like Nippon Steel Corporation want to make a deal with iron ore producers like Rio Tinto, Ltd to lower prices and ultimately reduce costs.

Under the deal, Rio Tinto, Ltd cut its prices of iron ore by more than a third. The company agreed to sell its fine iron ores at 97 U.S. cents per dry ton unit versus the 144.66 U.S. cents it sold for last year. Even the higher quality iron ore will sell for 112 U.S. cents a ton, down from the 201.69 U.S. cents it sold for last year. This deal could set a benchmark for prices for other mining companies. Companies in Japan like Sumitomo Metal Industries (SMMLY) and Kobe Steel Ltd (KBSTF) have already accepted the terms. However steel companies in China, the leading steel producer in the world, are against the agreement according to the China Iron and Steel Association. Because of the fall in steel prices they want the price cut of iron ore to be greater, as much as 50%.

According to a company report on NASDAQ, as of May 28, 2009 Rio Tinto closed at $176.70 a share, which is more than double the company's 52 week low of $59.20, suggesting that there is still room for the price of shares to drop and that investing in these stocks now could be a mistake.

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