The decline in iron ore prices has been well covered by myself and fellow contributors, and collectively we have said dozens of times that investors should steer clear of investment in this sector – particularly investing in smaller miners.
BHP Billiton Limited's (ASX: BHP) announcement to the market concerning its iron ore operations today illustrates exactly why investors need to avoid smaller producers for the time being.
Taking a long-term view of global steel demand, BHP informed the market that it is planning to cut costs in its Western Australian Iron Ore (WAIO) division by at least 25% and potentially increase production by a further 28%.
This will give BHP cash costs of under US$20 a tonne in the medium term (pre-transport and royalty costs) as well as total annual production of 290Mt by 2017.
With Rio Tinto also ramping up production and cutting costs both miners are in an excellent position to squeeze out competitors, particularly if Chinese steel demand shrinks or stagnates in the short term.
With iron ore already under US$80 a tonne, junior miners like Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI) are under considerable pressure to cut costs.
Both companies are maintaining a margin of only around $10 a tonne at this point and investors need not be geniuses to see just how easily they could turn into another Western Desert Resources Ltd.
Those looking for capital gains potential or dividends need to steer as far away as possible from the iron ore sector – unless you're buying BHP Billiton or Rio Tinto Limited (ASX: RIO), which have costs low enough to survive the most savage downturn.
You're better off avoiding iron ore altogether and looking at other opportunities – like one small company that is poised to reap huge benefits when our current low interest rate environment returns to normal.
It's a company I already own shares in, and its seven-year record of continuously growing revenues and dividends makes it – to my mind – a very strong contender for the single best company on the entire ASX.
Better yet it's fallen nearly 10% recently, providing investors with a great opportunity to jump on board a growing business with quality management.
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