Will iron ore become uneconomic?

It is believed that more scrutiny will be placed on the cost of producing iron ore, with many analysts expecting the commodity’s value to fall significantly over time.

Iron ore is Australia’s biggest export commodity and is currently trading at around US$137 per tonne – a level at which producers are still able to recognise considerable profits. However, with Chinese growth slowing down and companies around the globe ramping up their supplies, Nathan Littlewood, a New York-based analyst for Credit Suisse, believes that a significant portion of the world’s supply of the commodity will be unprofitable by 2016.

In their recent reports, iron ore heavyweights Fortescue Metals Group (ASX: FMG), BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) all stated that they would be increasing their levels of iron ore production. Meanwhile, Brazilian-based Vale is also considering adding a further 90 million tonnes of production annually.

As reported by The Australian Financial Review, global exports of the commodity are expected to reach 1.603 billion tonnes in 2016 whereby the price would fall significantly, making it harder to recognise profits. In September last year, the price fell as low as US$87, and analysts haven’t ruled out similar prices in the future.

Foolish takeaway

Although a number of miners’ shares have rallied in recent times, it is unlikely that these gains can be sustained. In fact, even the miners themselves don’t seem too confident regarding the near-term outlook for commodities. As such, it may be wise to look elsewhere for ideas for your portfolio.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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