The necessity of cost reductions and productivity improvements amongst Australian miners was again highlighted overnight as the price of iron ore, a key steelmaking ingredient, slipped below US$120 a tonne for the first time in over seven months.
While the commodity's price remained far more resilient than most analysts had been anticipating throughout 2013, it has fallen by more than 10% since the beginning of the year after last night's 2% drop which has it now trading at just US$119.90 a tonne. The bad news is, even greater falls are anticipated.
Recognising that there are still enormous profits to be made from mining the commodity, Australia's largest miners, namely BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), have all been heavily ramping up their production levels. In addition, they have each introduced cost-cutting initiatives and have ensured their productivity levels are on the rise.
It seems that these initiatives are now more important than ever as many in the market, including BHP's own CEO Andrew Mackenzie, believe that the commodity could have much further to slide.
While supply levels are set to continue increasing dramatically, demand growth is not expected to be as strong, which would apply a significant downward pressure on the commodity's price. Although Fortescue's CEO Nev Power believes the price could remain as high as US$120 a tonne for the remainder of the year (anticipating demand to remain as strong as in 2013), there are many pundits who expect it to fall to US$100 a tonne or lower.
The outlook for 2015 is even bleaker with Goldman Sachs anticipating the commodity to fall as low as US$80 a tonne.
Foolish takeaway
Although shares of each of the miners have experienced minor setbacks over the last few days, the recent drop in the commodity's price should not be too much of a concern for investors as the bigger players achieve profitability at much lower levels. On the other hand, I wouldn't feel comfortable exposing my portfolio to some of the industry's smaller players, such as Arrium Limited (ASX: ARI), as their margins are set to come under far greater pressure should the price continue to fall.
