While you might think Vale SA's decision to trim its output by 25 million tonnes – roughly 2% of the global iron ore market – was a positive for miners, it's actually bad news.
In an attempt to improve profitability, Vale is cancelling third-party purchases and cutting its high-cost production to focus on profit margins in an oversupplied iron ore market.
Despite that, Vale still intends to reach its total production target of 340 million tonnes in 2015. Readers already know that BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are focussed on maximising their production and margins and it has become apparent that Vale – the world's largest iron ore miner – is pursuing a similar strategy.
While a focus on profits and margins is important, the fact is that both Rio and BHP will see their profit smashed as plunging commodity prices hit the bottom line. Given that all three of the world's largest miners are trimming costs wherever possible, I do not see a happy future for anybody in the iron ore sector over the medium term.
When you consider the plight of smaller miners, the situation is even worse. Mount Gibson Iron Limited (ASX: MGX) recently announced that it would close its Extension Hill mine early if it could not sustainably remain profitable despite attempts to lift production.
Atlas Iron Limited (ASX: AGO) has managed to stay afloat thanks to an alliance of interested parties and a discounted capital raising, but its future appears in question at best.
If you're looking for more information on which iron miners are profitable at today's prices, you can see my recent article on the topic here.
All things considered, the outlook for the sector appears bleak even for those with a bullish outlook and a penchant for risk-taking. Foolish investors (capital 'F') will be far better off putting their money into a company with reliable earnings.
