Investors in Australia's iron ore sector have been hit hard over the last 16 months or so, over which time the commodity has sunk roughly 65%. Although it managed to stage a minor comeback overnight in what seems to be more of a rarity, that rebound could prove to be short-lived.
According to the Metal Bulletin, iron ore rose 2.7% to US$48.82 a tonne, down from US$62 a tonne roughly five weeks ago and US$135 in January 2014. While few analysts had even considered the possibility of iron ore sinking below US$50 a tonne this year, some are now preparing for the price to sink into the US$30s range.
As highlighted by the Fairfax press on Monday, Treasurer Joe Hockey has factored in a US$35 a tonne price for the May budget, compared to what was considered to be a conservative forecast of around US$60 a tonne in December's budget update.
Meanwhile, Fairfax said that Citi has also revised its forecast and now expects iron ore to average just US$37 a tonne for the remainder of the year.
What this means for you
Should prices fall to the levels being forecast by the government and Citigroup, a scenario which is looking increasingly possible, it's likely that only BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) would remain profitable.
However, they would be operating on thin margins and could be forced to slash their dividends (or increase their debt/decrease their capital expenditure to fund their dividends).
The situation becomes even direr for the nation's higher cost miners. Atlas Iron Limted (ASX: AGO) has already stated that it will cease production due to the commodity's downturn and many of its rivals, including Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX:BCI), mightn't be far off doing the same.
Investors need to remember that the miners have no control over the price at which they sell the commodity, meaning that their shares are leveraged to movements in the commodity's price. Given that iron ore is likely to fall further in value due to the supply and demand imbalance, investors would be advised to steer clear.
