Last week, Atlas Iron Limited (ASX: AGO) may very well have become the first big-name scalp to be claimed by the commodities crisis, but it's unlikely to be the last. The iron ore price continued its decline on Friday with more pain likely for the sector over the coming weeks and months.
According to data provided by the Metal Bulletin, the steel-making ingredient lost another 1.7% of its value to be trading at just US$47.53 a tonne. That represents a remarkable 23% decline over the last five weeks, while the sharp drop has even prompted the Australian government to consider its options should iron ore fall to US$35 a tonne, as reported by the Australian Financial Review.
The truth is, there is no way to know how far the price will drop. While reports suggest that Fortescue Metals Group Limited (ASX: FMG) could cease expansion in this low price environment – electing to instead focus on further cost reductions – the major players, being BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Vale will continue to increase their output.
Their lofty expansions come at a time when the additional supply simply is not needed. Chinese demand growth is declining rapidly while some experts have even suggested that demand has already peaked – nearly a decade ahead of when BHP and Rio Tinto both forecast demand to max out.
While Atlas Iron was the first to go, it's very possible that a number of other junior miners won't be far behind it. BHP Billiton and Rio Tinto are still operating at a profit – although at significantly thinner margins – but other miners such as Mount Gibson Iron Limited (ASX: MGX), BC Iron Limited (ASX: BCI) and even Fortescue will be really feeling the pinch.
Fortescue's considerable cash balance (US$1.6 billion as at 31 December 2014) will help it remain afloat for longer, but its enormous debt load could also force it into asset sales in the near future if conditions don't improve.
Although it might be tempting to buy into some of Australia's miners in the hope of a sharp turnaround, investors should look at Atlas Iron and remind themselves of the enormous risks involved investing in the sector. Rather than taking that risk, there are plenty of other great opportunities currently presenting themselves instead.
