Overnight, the spot price of iron ore fell to just $86.70, its lowest point since September 2012.
For those holding high-cost iron ore producers in their portfolios, the alarm bells will be ringing, with no end in sight.
Right now, many analysts would be reassessing their previous forecasts for the steel making ingredient. This morning The Australian reported that Shanghai-based CLSA analyst Ian Roper expects the iron ore price to reach just $US75 per tonne: "In the back half of next year as fresh supplies come online and demand in China continues to falter."
So what
Some smaller, high-cost, iron ore miners are already witnessing their profit margins fall away. A number of Chinese producers have already been forced out of the market.
However it's believed local high-cost producers such as Gindalbie Metals Ltd. (ASX: GBG) and Grange Resources Limited (ASX: GRR) are already losing money whilst Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Fortescue Metals Group Limited (ASX: AGO) are likely making less than $US15 per tonne at current prices.
If the iron ore price does drop below $US80 per tonne, I wouldn't want to be caught holding any of these companies in my stock portfolio.
Other than high costs of production, many small producers also sell lower-quality ores which attract lower spot prices. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), which have all-in costs of between $US40 and $US50 per tonne, produce higher grade ore. Their shipping costs are also cheaper than Brazil's Vale SA (ADR) (NYSE: VALE).
Now what
I've been bullish on iron ore heavyweight Rio Tinto for a number of months because it'll survive under prices even as low as $US60 per tonne. In coming years, producers will be forced out of the market and Rio, which like BHP, also has operations outside of iron ore, will be able to capitalise on the falling production of rival miners by increasing its market share and influence of seaborne supply. Now is not the time to be getting involved with any low cost producer.
