What a fall in the iron ore price means for Fortescue Metals Limited

The government is forecasting that iron ore will fall to $90 a tonne.

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This week’s Federal Budget didn’t provide much in the way of assurances for investors in iron ore miners such as Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO) with the Treasury painting a dour outlook for Australia’s resource sector.

The gloomy outlook from the Budget Papers included the following remarks – Coal prices are expected to remain weak while iron ore prices are expected to ease further in line with growing world supply.

This is bad news for producers whose very profitability is based upon the price they can sell their iron ore for.

So just how far does the Treasury forecast iron ore price will fall?

By the end of 2013 the Treasury is forecasting iron ore prices will drop to $95/tonne. By Christmas 2015 they expect the price to fall to $90/tonne; and by June 2016 it is forecasting an iron ore price of $87.11/tonne!

Investors in marginal iron ore producers should be alarmed by these forecasts. However, shareholders in Fortescue can take some comfort from their firm’s fantastic efforts at lowering costs. Through a keen focus on efficiencies, costs at Fortescue dropped 34% in the last half with management stating that the breakeven cash price for the iron ore giant is US$70/tonne.

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

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