'The new normal'.
Normally I'd ignore those three words, given that they're amongst the most overused in the investing world. But when I saw them sprawled out on Page 11 of The Australian Financial Review this morning, I couldn't help but feel they might be right on the mark this time…
To put it into perspective, the words were employed by BHP Billiton Limited's (ASX: BHP) marketing boss, Mike Henry, when describing the outlook for the price of iron ore. He believes that prices below US$100 a tonne are the new normal and that they are highly unlikely to climb above that price on a sustained basis anytime soon.
The reason? The world's largest miners, including BHP Billiton, Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Brazil's Vale are undertaking enormous expansion projects in order to reduce costs and improve overall productivity, thus causing a tidal wave of fresh supplies. At the same time, demand from China is waning, which is forcing prices downwards.
As it stands, iron ore is hovering just above US$80 a tonne, having lost more than 40% of its value since the beginning of the year. While these miners are able to cope with lower prices thanks to their low cost operations, the nation's smaller miners are in serious threat of extinction should the price fall any further.
As such, investors thinking about investing in companies like Mount Gibson Iron Limited (ASX: MGX), Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI) might want to think again. While their shares could certainly surge in the near-term if the iron ore price does recover, they are certainly not a good long-term bet.