Although Australia's largest miners have repeatedly reassured the market that the tumbling iron ore prices are nothing to worry about, Brazilian iron ore heavyweight Vale has admitted that 'everyone is nervous' about the current situation.
As it stands, iron ore is now sitting at just US$79.80 a tonne – its lowest price in more than five years and more than 40% below its price at the beginning of the calendar year. While some investors are anxiously waiting for a sudden recovery, a number of analysts believe it could fall even further over the coming months as demand growth from China continues to slow. In fact, Goldman Sachs' analysts have even described it as "the end of the Iron Age."
Despite the plummeting prices however, the world's largest miners continue to increase their production rates in an effort to reduce costs and claim a larger share of the global market. Of course, this is a major contributing factor to the falling prices, but Australia's BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have all expressed their confidence that demand for iron ore will remain strong for years to come.
While each of these miners are recognising profits even at these depressed prices, their shares have fallen dramatically with investors becoming increasingly cautious over their margins and how their overall earnings could be impacted. It is estimated that BHP's and Rio Tinto's breakeven prices are at around US$40 – US$45 a tonne, while Fortescue's is estimate to be at around US$70 a tonne.
Questions have also been raised about Fortescue's ability to repay its debts as quickly as it had hoped. The company vowed to pay down approximately US$2-2.5 billion over the next two years but that could largely depend on the price movements of the commodity itself. As quoted in The Australian Financial Review, CEO Neville Power said: "We made those [debt repayment] forecasts on the basis of an iron ore price at around about $US90 per tonne."
At this stage, it is looking less likely the iron ore price will recover to those levels anytime soon.
Should you buy?
Shares of Australia's iron ore miners are trading at a considerable discount compared to last month as a result of the sudden downturn in the commodity's price. Although some investors are looking at this as a wonderful buying opportunity, I am taking a far more cautious approach and avoiding the sector altogether, for now at least.
Luckily for investors, there are plenty of other ways to profit from Australia's resources sector.
