Mining shares are getting hammered in morning trade on the ASX, after iron ore prices fell 3% overnight.
The slide appears set to continue, after falling US$4 overnight, and have now slipped around US$20 in the last three weeks. Iron ore is currently trading near US$139 a tonne.
Iron ore majors BHP Billiton (ASX: BHP) and Rio Tinto Limited (ASX: RIO), along with market analysts and commodities traders had been predicting the price to fall for some time now, with many considering a price above US$150 a tonne to be unsustainable.
In trading today, BHP is down 1.7%, Rio down 1.5% while Fortescue Metals Group (ASX: FMG) shares have dropped more than 5%, and Atlas Iron Limited (ASX: AGO) has seen its shares lose close to 4%.
Many commentators have forecast an iron ore price of between US$100 and US$120 a tonne going forward, and suggesting a price below US$90 a tonne was unlikely. The US$100 to US$120 a tonne level has been indicated as a level where many Chinese iron ore miners become unprofitable and therefore forced to shut down, cutting off a large portion of supply and providing a natural "bottom" price.
That might be fine if the supply of iron ore was going to remain steady – unfortunately for iron ore miners, supply is growing massively. Fortescue is on track to increase production to around 155 million tonnes per year, while Rio is targeting 353 million tonnes of production. BHP and Brazilian iron ore giant Vale are also ramping up production, which combined with other producers will likely see the supply of iron ore outweigh demand by a significant margin.
Basic laws of economics means that can only have one consequence which is to push the iron ore price further down.
Foolish takeaway
Some analysts and commentators have predicted iron ore prices closer to US$50 to US$60 a tonne. They may well be right, which will likely have dire consequences for some of Australia's smaller iron ore miners, and one or two larger ones.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.
