This morning's Wall Street Journal reads: "China Data Points to Weak Growth"
Whilst, "China economy concerns worry investors" goes the Australian Financial Review.
For Australian resources investors, this is bad news.
Apart from the exceptionally long lead times between project design and production, huge ongoing capital requirements and volatile commodity prices; investors will now have to try and predict future demand.
For all iron ore miners – yes, even the biggest players – that means one thing: China.
It's accountable for two thirds of all iron ore consumption.
Worse still, as noted by Motley Fool Pro Investment Advisor Joe Magyer following his recent China research trip, analysts at a prominent investment house forecasted oversupply to balloon by 600% between 2014 and 2017.
For context, the price of iron ore – a steel making ingredient – fell 49.3% between December 2013 and December 2014. If China's growth continues to wane (which is very likely in this Fool's opinion), you can bet there's further falls on their way.
But even the biggest miners, Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), are now in the firing line.
As The Sydney Morning Herald reported today, "BHP Billiton and Rio Tinto face choice between debt and dividends."
Watch out below…
If the iron ore price continues to fall, some analysts believe there's a chance Rio and BHP will be forced to either cut their dividends or keep their payouts high by taking on more debt.
That's akin to taking it out of your left pocket, and putting it in your right pocket.
But you see both Rio and BHP have promised – and promoted – their progressive shareholder returns policy with each company undertaking an extended form of capital management (i.e. increased dividends, share buybacks etc.) in the past year.
That's been viable with a relatively high iron ore price.
According to UBS analysts both Rio and BHP have some of the best costs in the market with breakeven prices of around $US34 per tonne. Citigroup's estimates are very similar.
Currently, iron ore fetches $US48.82 per tonne. Down from around $US135 per tonne in early 2014.
But the worst could be yet to come…
Citigroup is forecasting a spot price of $US37 per tonne whilst the federal treasurer, Joe Hockey, is contemplating using a forecast price of $US35 per tonne in the government's May budget.
Will Rio's and BHP's dividends come under threat at those prices?
They almost certainly will.
And don't think it won't happen.
Iron ore price per tonne over 30 years. Source: Indexmundi.com
As can be seen from the above graph, iron ore could have a lot further to fall in the years ahead, once China's unprecedented economic growth and infrastructure development subsides.
Should you sell your BHP Billiton and Rio Tinto shares?
Given the current oversupply position is being tipped to get much worse before it gets better, I would be inclined to offload all of my iron ore and mining services shares sooner rather than later.
Whilst BHP and Rio are 'diversified' across a number of commodities, iron ore is their most profitable by a long shot (for BHP, the plummeting oil price is another reason to proceed with caution).
