What: The iron ore price has continued to weaken overnight in overseas trade with the bulk commodity slipping further to just under US$97 per tonne. This marks the lowest level for iron ore since September last year. In response to the price falls, Fortescue Metals Group Limited (ASX: FMG) shares have been sold down over 2% in early trade.
So what: While Australia's largest producers –Fortescue, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) – are all still profitable at current price levels, the profit margin for Fortescue in particular is becoming increasingly skinny. This is concerning given predictions that by 2015 iron ore supply may significantly exceed demand, with Credit Suisse warning that later this year the iron ore price could drop to around US$85 per tonne.
Now what: BHP and Rio have iron ore production costs of $45 and $43 per tonne respectively according to one well-known Australian fund manager. As low-cost producers they should still enjoy juicy profit margins at US$85 per tonne. Fortescue however is estimated to have a total cost of production of US$72 per tonne which suggests a much diminished profit outlook could be in store for the miner.
