The price of iron ore has dropped to a three-month low, losing 1.1% to US$51.03 per tonne, overnight.
It's the seventh consecutive day of falls and the spot iron ore price has now lost 10% in the past ten trading days. The last time it was this low was in June 2015, shortly before the commodity price collapsed to US$44.10 in July 2015.
Many analysts and commentators are predicting prices in the US$40 to US$50 range over the next year or so, but I suspect those are optimistic predictions – and arrived at by extrapolating short-term trends. After all, who wants to be the analyst that predicts prices of US$20 to US$30 per tonne and risk being wrong? Safer to predict small falls but stay in the company of your peers.
Well, I don't mind being wrong – and I suspect that the iron ore price could fall much further in the next year or two.
I outlined my reasoning in this article last week, but to summarise:-
- Massive supply is still coming on stream – much of it very low cost and high grade as we showed in the chart in this article.
- China's economy is transitioning from one of building infrastructure to one led by consumer consumption, meaning less demand for steel (and hence iron ore).
- Demand for iron ore, particularly from China is likely to fall in the face of a massive glut of steel.
- Chinese steel producers are barely surviving, most are unprofitable and world steel demand can't keep up with steel production.
- South Korea's biggest steelmaker, Posco, posted a loss of US$582 million in the last quarter.
- Economist Ross Garnaut predicts that China's steel production has peaked and will fall to 600 million tonnes over the next 15 years.
- The three giants of the industry, BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale can produce a tonne of iron ore for less than US$20. Vale is aiming for production costs of less than US$13 a tonne by 2018. BHP is aiming to reduce production costs to US$15 a tonne and Rio Tinto already produces iron ore at a cost of US$16.20 a tonne. Even Fortescue Metals Group Limited (ASX: FMG) recorded cash production costs of US$16.90 per tonne last quarter.
All these factors are likely to place immense downward pressure on the iron ore price.
For Australia's junior iron ore miners, this is bad news. Many already receive a discounted price because their ore is not premium quality, and because they lack the scale of the giant miners, their production costs are also much higher.
How they are going to survive if iron ore prices tumble to US$20/US$30 per tonne is anyone's guess.
Foolish takeaway
Foolish investors may want to steer clear of the iron ore juniors including Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI), Arrium Limited (ASX: ARI), Gindalbie Metals Ltd (ASX: GBG) and Mount Gibson Iron Limited (ASX: MGX) as well as Fortescue for now.
