The major iron ore miners are all taking a bath today, awash with red ink from the still falling iron ore prices coming out of China. Yesterday, the spot price of iron ore at the Chinese port of Tianjin slipped down to US$84.30, the lowest since October 2009.
Leading the pack down is Fortescue Metals Group Limited (ASX: FMG), which was down as much as 4.12% in afternoon trading. It also set a new 52-week low of $3.86, last hit in August 2013. In mid-June this year it did get down to $3.91, yet rallied to as much as $5.03 in late July.
Record export volumes in August
Just this week the company posted export volumes of more than 15 million tonnes for the month of August – a record for Fortescue Metals. This is a result of the company hitting its target of more than 155 million tonnes of annual production capacity earlier this year.
It has a new mine, Kings Valley, which was officially opened in March and has a capacity for 40 million tonnes per annum (mtpa). This added production helped achieve the target, but with the majors Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) pushing their own export volumes up as quickly as possible, the deluge of ore supply is going up against weakened demand.
Iron ore prices look likely to go one way then. Down.
Cash costs and break-even prices
Rio Tinto boasts the lowest cash costs of the three at around US$22 / tonne. Its break-even price for production, export and extra costs is estimated to be about US$42 / tonne by UBS. BHP comes in second with a price of about US$51 / tonne. Then comes Fortescue, with estimates of about US$70 / tonne.
Earlier this week there were market predictions by CLSA that iron ore could fall to as little as US$75 / tonne by the last half of next year. If that projection holds true, Fortescue could get pinched unless it can reduce its costs further. It is buying eight new ships that can carry more ore and reduce expenses.
Although it may be interesting or even exciting to see how this plays out over the next year or so, investors should probably wait on the sidelines. While the stock "story" weakens, BHP or Rio Tinto would be safer choices because of their wider potential profit margins. In addition, BHP has the most product diversification to help offset iron ore's price fall.
Rather than spending a lot of time predicting where iron ore will ultimately go, there are a number of other alternative stocks with better growth prospects you can take advantage of today.
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