Australia's iron ore miners have slumped today after it was revealed that Citigroup has slashed its long-term price forecast for the commodity by a massive 32%.
The iron ore price has rocketed higher in recent weeks and gained another 2.6% overnight to trade at US$62.78 a tonne, according to data provided by the Metal Bulletin. But while it has managed to exceed most analysts' expectations in the near term, the market fundamentals suggest that they won't be fooled in the long run.
The recent rally has largely been fuelled by indications from two of the world's largest producers, Brazil's Vale and Melbourne-based BHP Billiton Limited (ASX: BHP), that they would delay their expansion plans due to the low price environment. While that proved to be enough to provide some temporary relief; other high-cost miners around the world were always going to take advantage of the situation to increase their own output, thus pushing prices down once again.
The fact is, while global output continues to rise, demand is contracting and is expected to continue doing so over the next decade as steel consumption growth in China peaks. As highlighted by the Fairfax press, this was Citigroup's reason for cutting its long run price forecast by 32% from US$81 a tonne down to just US$55.
It also said that prices may average just US$40 between 2016 and 2018 which would likely prove catastrophic for most miners around the world. That could potentially include Australian juniors such as BC Iron Limited (ASX: BCI), Mount Gibson Iron Limited (ASX: MGX) and perhaps even Fortescue Metals Group Limited (ASX: FMG).
Notably, lower iron ore prices aren't good news for BHP Billiton or Rio Tinto Limited (ASX: RIO) either, although they are far better equipped to weather the storm thanks to their lower costs.
While there is no way of knowing where the iron ore price will go in the near-future, most analysts recognise the blistering headwinds facing the industry which could crush profitability and ultimately impact overall shareholder returns. As such, long-term investors would be well advised to steer well clear and focus on some of the market's other compelling opportunities.
