Australia is the world's biggest exporter of iron ore and it also has the title of the country's most lucrative product. In the past year, the Australian iron ore market has grown more than 16% in value, but is it worth the risk if the prices are set to keep falling?
Mining executives believe that ramping up production will help them remain competitive and take advantage of the next upturn in prices. However with job cuts, project cancellations and increasing costs, many share prices look like they're headed downwards.
Yesterday, after Glencore Xstrata announced an axing of around 50 jobs at its Ravensworth mine in New South Wales, US giant Peabody Energy (NYSE: BTU) said it also plans to cut up 450 jobs. It seems that some are willing to weather the storm while others aren't.
According to the Bureau of Resources and Energy Economics (BREE), both coal and iron ore prices can be expected to fall in the next year with the latter expected to become steady at around US$117 in 2014. This comes on the back of overnight falls of 2.2% to a low of US$114.
Despite falling prices, the increases in iron ore output are the result of expanding projects by some of our biggest companies including Rio Tinto (ASX: RIO), BHP (ASX: BHP) and Fortescue (ASX: FMG). However, some of our smaller 'pure play' iron ore miners like Atlas Iron (ASX: AGO) and Gindalbie Metals (ASX: GBG) are also expected to increase their output in coming years.
The one upside for our resource companies is the falling Australian dollar and BREE believes the difference between 103 and 94 US cents represents approximately $6 billion.
Foolish takeaway
It'll be a rocky road ahead for most of our miners with prices falling, supply increasing and projects being sold off. It would be wise to wait until the next annual report before making any assumptions on their medium to long term prospects. With the banks and our biggest telco dropping in price substantially and paying much healthier dividends, perhaps your money could be better spent elsewhere.
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More reading
- Should you buy Rio Tinto?
- 3 reasons not to buy Rio Tinto
- Rio Tinto eyes more value in diamonds
- Rebound in iron ore price keeps miners' hopes alive
Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
