SYDNEY—Investors are cutting their exposure to iron ore as the industry faces a flood of new supply that has pushed prices for the steelmaking ingredient close to two-year lows.
Billions of dollars are being spent by resources companies on new iron-ore mines in countries from Australia to Brazil, aiming to meet Asia's appetite for steel used in everything from apartment buildings to cars. But many investors are concerned that demand isn't strong enough to soak up that supply, and that the industry could face a prolonged slump that could force shutdowns of higher-cost mines as well as layoffs.
"In previous years, we have seen a sharp selloff followed by a sharp rebound," said Neil Gregson, a fund manager at J.P. Morgan Asset Management overseeing about US$3.5 billion in natural-resources investments. "This time, we don't think there will be that sharp rebound."
The benchmark price of ore with 62% iron content imported through China's Tianjin port is down by about a third this year, as rising supplies from Australian mines gives steelmakers the upper hand in negotiations. Iron ore was trading at about US$93 a metric ton on Tuesday, after slipping as low as US$89 a ton last week to its weakest level since September 2012. Iron ore on Wednesday rose 0.4% to US$93.70 a ton.
In recent months, Mr. Gregson became a seller of the stocks of Australian iron-ore producers, including Rio Tinto Ltd. and Fortescue Metals Group Ltd. FMG.AU +2.52%The mining companies' share prices have fallen 14% and 26%, respectively, since the start of this year. He expects iron-ore prices to move in a US$10 band on either side of current levels.
Mr. Gregson isn't alone in taking a more bearish view. In recent weeks, companies including Deutsche Bank AG DBK.XE -2.78% and Commonwealth Bank of AustraliaCBA.AU +1.12% have slashed their forecasts for iron-ore prices. Morgan StanleyMS -1.61% lowered its price estimates by 21% in each of the next two years, to US$90 a ton in 2015 and US$87 a ton in 2016, saying it had underestimated the speed at which new mines were starting up.
About 1.3 billion tons of iron ore is traded by sea each year, with more than half of these shipments heading to China. Over the past decade, supply has largely kept pace with demand, in part because India has curbed output and exports as a result of environmental concerns.