Depressed iron ore prices are acting as a heavy weight on the industry with numerous miners facing the very real threat of closure.
Although its price rose by nearly 2% overnight, iron ore's price remains near a six-year low at just US$62.38 a tonne, according to the Metal Bulletin, having more than halved in value since the beginning of 2014. While lower prices are acting as a strain on the big miners' cash flows; the country's smaller miners are under enormous pressure to maintain profitability.
Companies such as Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) have worked around the clock to reduce their input costs in order to reduce their break-even level. While it is acknowledged that they've each done a remarkable job in that respect, the reality is that costs can't be cut much more. Thus, should the price of iron ore fall any further, they may be squeezed from the market.
To highlight the danger currently facing the sector, the Fairfax press said yesterday that a number of Australian iron ore miners are at risk of closure right now. Citing a note from resources consultancy Wood Mackenzie, it named Arrium Limited's (ASX: ARI) Peculiar Knob mine and Cliffs Natural Resources' Koolyanobbing mine as being at risk of potential closure.
In addition to the problems posed by low prices, the companies mentioned above also have to contend with lower quality ore (which fetches an even lower price), significant port fees, long road-haul distances and higher strip ratios. While a weaker Australian dollar and low oil prices will help offset some of the costs, the iron ore price is tipped to fall even further – possibly as low as US$30 a tonne – which would almost certainly be the nail in the coffin for some of Australia's high-cost players.
Should you buy?
The safest way investors could gain exposure to the sector would be through one of the commodity's low-cost producers – being either BHP Billiton Limited (ASX: BHP) or Rio Tinto Limited (ASX: RIO). However, given the bleak outlook for the commodity, the best option investors could take is to remain on the sidelines for now and focus on other compelling investment opportunities.
