As expected, the recent optimism buoying iron ore prices has turned out to be just that, with the steel-making ingredient dropping below the US$50 level again overnight.
While the price may continue to fluctuate day-to-day, there's no sign of real relief for companies like Fortescue Metals Group Limited (ASX: FMG), which continues to grapple with razor-thin margins and heavy debt.
(Fortunately for investors, Fortescue still appears to be profitable at current iron ore prices).
For junior miners the situation is far worse, and producers like BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) are no doubt wondering if they'll end up like Atlas Iron Limited (ASX: AGO), which was voluntarily suspended from trading recently.
The macro factors driving the iron ore market show no signs of shifting either, with Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) continuing to ratchet up their output and clamp down on costs.
Increased output can only make prices worse before they get better – and an improvement in iron ore prices is likely to come at a heavy cost; namely the existence of a number of 'at risk' producers globally.
Government intervention is possible, if unlikely, with the West Australian Premier reportedly very unhappy with the way Rio and BHP are perceived to be destroying the market.
Since lower iron ore prices are smashing West Australian revenues and given that the iron ore is effectively owned by the state, the Premier is reportedly investigating ways in which the situation could be salvaged.
Rio and BHP could further turn the whole show into a circus, with their focus on improving margins and cutting costs (partly through increasing production) in a weak price environment effectively driving down prices, which in turn requires a new round of cost-cutting and production increases in order to maintain margins.
It's not the safest place to park your dollars, and it's not over yet.
I again recommend that investors steer clear of the sector or make a conscious decision to only own the two best companies – BHP and Rio.
