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Iron ore miners hammered: More pain to come?

iron ore

Oh dear, the iron ore price continues to fall.

From a US$135 a tonne price at the start of this year, iron ore dropped another 1.3% on Friday to trade at US$97.50 a tonne. And it’s having a giant impact on Australia’s iron ore miners’ share prices.

Since January, Atlas Iron Limited (ASX: AGO) has lost 37%, Mount Gibson Iron Limited (ASX: MGX) 24% and BC Iron Limited (ASX: BCI) 30%. Even Australia’s third largest iron ore miner has fared badly, with Fortescue Metals Group Limited (ASX: FMG) losing 22% of its share price.

The reasons for the falling commodity price are many. Fears that China won’t grow as much or as fast as previously predicted, falling steel production (iron is an essential ingredient), rising oversupply as miners have increased production and a crackdown in China on the use of iron as collateral for loans by steel mills are all headwinds facing the industry.

BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) had both been warning that prices were likely to fall this year, with BHP reporting that supply this year had grown by 120 million tonnes, while demand had increased by only half that – at 60 million tonnes. And the big miners are most to blame for the oversupply. The trio of BHP, Rio and Fortescue have all upped production massively in the past twelve months or so.

For BHP and Rio though, the falling price is not the biggest headache they face. With estimated production costs of US$45 and $43 a tonne respectively, the iron ore price would have to fall much further to cause them major concerns.

For the juniors with higher production costs, further falls could become catastrophic. Avoiding them now may well be a good way of limiting any major damage to your portfolio.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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