Fortescue Metals Group Limited (ASX: FMG) has urged investors not to fret over the recent falls in iron ore prices, stating that although there are short-term pricing pressures, there is nothing to worry about over the long-haul.
According to the miner's CEO Neville Power, who was speaking at the Credit Suisse Asian Investment Conference in Hong Kong, the group's profit margins remain strong despite the commodity's recent price plunge and would still be comfortable even if it fell below US$100 a tonne.
Currently, Fortescue's breakeven price is estimated to be around US$70 a tonne, meaning that the higher the commodity's price, the greater the profit Fortescue recognises. While that is nowhere near as low as the predicted breakeven prices for larger rivals Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) at US$43 and US$45 a tonne respectively, Fortescue is expected to continue closing the gap as it increases production and continues to decrease costs. Its ability to function at lower commodity prices will further be strengthened as it continues to repay its enormous debt load.
Power predicts "probably three to four more decades of steel consumption from China to come". While demand will continue to grow, the concern becomes how fast? With mining giants in Australia and Brazil both heavily ramping up their production levels, supply growth will likely outpace demand growth which will push the commodity's price down further.
In fact, Citi recently downgraded their recommendations on BHP and Rio Tinto and lowered their 12-month price targets based on the expectation that iron ore will fall to US$80 a tonne within the next two years, driven by "an overwhelming increase in iron ore supply". That resembles a 27% drop from today's price of US$110 a tonne.
Foolish takeaway
As is the case with the mining sector, the miners themselves have absolutely no control over the price of commodities. While I do not share Power's bullish stance on iron ore, I certainly won't be considering buying into Fortescue unless they fall significantly lower than today's $5.35 price tag.
