Mining groups are urging investors to look beyond the sector’s short-term glut and instead focus on its medium-to-long-term prospects, suggesting that the price tag on iron ore will soon recover.
Atlas Iron Limited (ASX: AGO) has joined the likes of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) in trying to calm the market down after its recent jitters, which has seen iron ore – a key steelmaking ingredient and Australia’s most major export commodity – plunge more than 16% in the last three weeks, including an incredible 8% fall on Tuesday.
Speaking to The Australian Financial Review, Atlas Iron’s managing director Ken Brinsden said: “There is a lot of day-to-day noise and headlines about China’s demise or extraordinary growth… It fluctuates between two pretty amazing extremes. If you are prepared to look through the middle ground, it is still pretty healthy for natural resources.”
Despite the recent falls, each of the miners will continue to ramp up their production levels as they anticipate demand for the commodity to remain strong for years to come. BHP and Rio Tinto, for instance, believe Chinese demand for steel will be over 1 billion tonnes by 2025 or 2030. They will also focus on reducing costs and unnecessary spending whilst also improving productivity which will boost margins.
It should also be noted that each of the miners are still making a healthy profit even at today’s price of US$104.90. Rio Tinto, Australia’s lowest cost iron ore producer, is estimated to have a break-even price of US$43 a tonne according to UBS estimates, while Australia’s third-largest miner, Fortescue Metals Group Limited’s (ASX: FMG), is up around US$70 a tonne.
Although shares in the miners have dropped considerably in recent weeks, it is still not a good time for you to buy shares in the industry. The volatility is too high and any further drops in the commodity’s price could see the market punish the shares even more.