The spot iron ore price continued its rapid plunge overnight with the commodity falling 1% to just US$87.30. Its lowest point in nearly two years and down more than 35% since the beginning of 2014. And the bad news is, it could get a whole lot worse…
An article in The Australian Financial Review this morning summed it up perfectly:
"The new iron age will be characterised by a Darwinian struggle for survival, from which only the fittest will emerge."
In regards to the 'fittest', that'll be companies like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). These miners possess low breakeven prices and have the capacity to continue ramping up production levels to reduce costs and offset the commodity's falling value.
While this approach is indeed necessary for their growth in the foreseeable future, it will consequently apply further pressure to the price which could prove fatal for the nation's smaller miners. As an example, Atlas Iron Limited (ASX: AGO) maintains a breakeven price of "mid to low $US80s". Should the iron ore price sink to US$80 a tonne, like so many analysts are expecting it will, the junior miner will be recognising a loss for every tonne produced.
It should be noted that I'm simply using Atlas Iron as an example due to its higher costs, and that I do not necessarily believe the miner will be a fatality of falling commodity prices.
The reality is that the days of mega profits are long gone and investors need to be far more cautious when investing in the mining sector. If I was to pick one or two to buy today, it would be either BHP Billiton or Rio Tinto, both of which maintain a higher level of diversification to spread any business risks. In my eyes, Fortescue relies too heavily on iron ore (although its margins are improving), while I would not be willing to expose my portfolio to the risks being faced by any of the junior miners.