Australia's largest miners have slumped in price after key steelmaking ingredient iron ore plunged to a seven-week low of US$108.60 a tonne, down significantly from last year's average price of around US$135 a tonne. However, the news could well get much worse with analysts now suggesting the commodity could fall below US$80 sooner than had been anticipated.
While JCP Investment Partners believes the price will remain above US$100 a tonne this year, it expects 2015 to be a very different story. It forecast that supply growth from Australian and Brazilian producers will far outpace the demand growth from emerging economies like China, which will put downwards pressure on the commodity's price.
So just how safe are our miners?
Even if iron ore did fall to US$80 a tonne, Australia's three largest miners, being Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG), would still remain profitable. It is estimated that Rio Tinto's and BHP's breakeven prices are around US$43 and US$45 a tonne respectively while Fortescue's is around US$70. Those breakeven prices will be improved as the miners continue to focus on increasing productivity and reducing costs.
While they will remain profitable however, their margins and therefore their overall earnings will still be hugely impacted. Rio Tinto and Fortescue would likely be hit worse than BHP, given BHP's higher level of diversification between operations.
However, some of the nation's smaller producers might not be so lucky. Companies like Mount Gibson Iron Limited (ASX: MGX) and Arrium Limited (ASX: ARI) rely on stronger commodity prices due to their higher costs of production and could come under significant pressure should iron ore fall as low as JCP is expecting.
Foolish takeaway
As production levels around the globe continue to increase, it seems reasonable to assume that iron ore's price will only decline in the medium-to-long terms. Investors wanting to limit their risk should, at very least, avoid the country's smaller producers and may instead want to consider BHP Billiton for its lower level of reliance on iron ore for earnings.
