Iron ore companies at odds

Periodic reports from BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Arrium (ASX: ARI) have one thing in common: they showed a decrease in profit.

Each company relies on iron ore for differing amounts of revenue but all consider it an valuable product in their arsenal. Whilst BHP derives only 28.5% of revenue from iron ore, its return on assets make it the most profitable commodity for the mining giant.

However, the company expects the future price of the steel making ingredient to be lower thanks to increased supply and slowing demand from China. “In the short term, increased supply is likely to exert downward pressure on prices”.

BHP’s outlook on iron ore might be more bullish than those miners that have a greater reliance on the commodity. Arrium said in its full year report that “Economic growth in China is expected to continue at high levels despite recent downward revisions in the rate of growth, and this is expected to underpin continued strong demand for iron ore”. Rio also said that the fundamentals for iron ore remain strong but China’s economy is unlikely to recover in the second half of the year.

Foolish takeaway

Regardless of future prices, each of these companies have reported a reduction in profit and attributed some of the decreases to lower iron ore (and other commodity) prices. With many analysts predicting softer prices in the near future (possibly around $80-$90 per tonne) perhaps now is not the time to be buying companies that rely on iron ore. Instead, investors could look to other areas of the economy that have more certainty and yield better dividends.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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