It's become very apparent that the iron ore sector is, if not racing to the bottom, definitely searching for a 'goldilocks' iron ore price level that is profitable for the major producers, while still low enough to discourage competition and new investment into the sector.
BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) continue with their iron ore expansion plans, a move that has sharply divided institutional investors in both companies.
One half believes that the two major miners are doing the right thing, as current expansions will have good margins even with today's low iron ore prices.
The other half says it is foolish to continue pouring extra supply into a market that is already oversupplied, as this is sure to drive prices even lower and crush profits irrespective of output.
Both sides have valid points, and the 'truth' probably lies in the middle of these two opposing views.
A significant percentage of investors in both camps find the sector too risky even for bargain hunting and speculation, preferring to wait until the dust settles.
Rio and BHP are both targeting roughly 30% improvements in iron ore output by 2017, compared to demand which is expected to grow somewhere between 15% and 25% over the same period.
This is likely to see a surplus and weaker prices maintained, and the fact that the lion's share of both expansions are already finished adds additional selling pressure into the market earlier, when it least needs it.
However prices at the current level are also likely to push higher-cost supply out of the market over those years, which may decrease global supply enough to bring it back in line with the expected demand growth.
Australian miners are also reportedly growing their share of the iron ore pie, with our exports accounting for 59% (up from 51% previously) of China's total iron ore imports in 2014.
Furthermore once higher cost supply is out of the market, the world's major iron miners; Brazil's Vale, Rio, BHP, and Fortescue Metals Group Limited (ASX: FMG) will have a high degree of control over supply, and be able to adjust prices to better suit their targeted returns.
The real question is whether or not shareholder earnings are going to suffer in the interim while these strategies play out. I'm of the opinion that they will, however Rio's CEO has repeatedly stated that the expansion is adding value and driving improvement for shareholders (and he should know).
I guess time will tell.
