The price of iron ore extended its violent slide on Friday amid concerns that the world's largest miners will continue to ramp up production, exacerbating the market's massive oversupply situation.
According to data from the Metal Bulletin Ltd., the commodity slid US$2.22 or 4% to just US$53.14 a tonne, its lowest price since at least May 2009 when the benchmark pricing system began. It has now declined in excess of 60% since January 2014 as Chinese demand continues to wane.
At the same time, the largest producers, including Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Vale, continue to ramp up production in an effort to reduce their average cost per tonne, whilst simultaneously squeezing the high-cost operators from the market – a strategy which has been widely criticised.
At its current level, it's likely that a number of producers will be operating below breakeven levels. That could include companies such as BC Iron Limited (ASX: BCI), Mount Gibson Iron Limited (ASX: MGX), Arrium Ltd (ASX: ARI) and even Fortescue Metals Group Limited (ASX: FMG). Fortescue also carries an enormous pile of debt which is becoming increasingly difficult to repay as the commodity's price falls.
Right now, BHP Billiton and Rio Tinto are better positioned to weather the commodities crisis, although some estimates suggest they could come under heavy pressure in the near future, too. As reported by Fairfax, Bloomberg intelligence shows that the entire iron ore industry will face a "breaking point" if output continues to climb and prices are driven below US$30 a tonne. At that price, even the bigger players could be operating at a loss and forced to close mines.
While each of the major players remain committed to their expansion targets, it appears likely that the iron ore price will continue to slide over the coming months, or even years. As such, investors would be wise to steer well clear of the sector and focus on some of the market's lower risk opportunities.
