Iron ore price set to sink below US$50 a tonne

The iron ore price fell 1.8% overnight and futures pointing to further falls today

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The iron ore price fell 1.8% overnight to US$50.41 a tonne, and the commodity has now lost US$20 a tonne a 28.5% since peaking above US$70 a tonne on April 21.

But iron ore futures are pointing to solid falls in the spot iron ore price tonight – which will take the commodity's price below the US$50 a tonne mark.

The falls in both the spot and futures markets for iron ore clearly shows that the crack down on retail speculators in the market is having an effect. It also shows that the recent spike was driven by speculators and was never sustainable.

That could see the spot iron ore price sink into the low US$40 a tonne range, causing major problems for Australia's higher-cost miners such as Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Gindalbie Metals Ltd (ASX: GBG).

BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Gina Rinehart's Roy Hill mine should be able to remain cash flow positive at those prices, but it will severely crimp their profits.

As we wrote earlier this week, each US$1 fall in the iron ore price wipes US$144 million off BHP's profit results and is one of the main reasons for BHP's share price sinking from above $21 to its current levels below $19. Iron ore represents 34% of the miner's total revenues in the last half year, and thanks to losses in other commodities, 144% of total earnings before interest and tax (EBIT).

The one consolation for Australia's miners is that the Australian dollar has dropped from 78 US cents in mid-April to under 72 US cents presently. That means they are receiving around A$70 a tonne for benchmark iron ore.

Foolish takeaway

Some economists suggest the exchange rate could fall to as low as 50 US cents, which would be a huge boost for Australia's miners for most commodities – including iron ore. But they will still be hoping the spot iron ore price doesn't fall too much further from here.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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