The spot iron ore price was hammered on Friday, down 4% to US$91.80 a tonne on Friday, the lowest price in 20 months, and a US$80 something price is on the cards.
Giant miners Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) saw their share prices fall dramatically on the London Stock Exchange, falling 4.1% and 3.7% respectively. The pain is likely to extend to their ASX listings today, with smaller iron ore miners Fortescue Metals Group Ltd (ASX: FMG), Atlas Iron limited (ASX: AGO) and the likes of Mount Gibson Iron Limited (ASX: MGX) to bear the brunt of the fall.
As we’ve explained in numerous articles, the higher cost, junior miners are most in the firing line, with Fortescue estimated to break even at around US$70 a tonne. Mount Gibson and Atlas Iron’s cash costs are assumed to be US$84 and US$80 a tonne respectively.
The issue is rising supply unable to be met by similar levels in demand. This has led to an estimated 100 million tonnes sitting in stockpiles in Chinese ports. China is the world’s largest importer of iron ore, and producer of steel.
Until those stockpiles fall meaningfully, the iron ore price is likely to continue heading lower. The concern for Australia’s junior miners is that iron ore shipments could be turned away – a situation that has occurred before. A number of Mount Gibson’s customers turned back iron ore shipments in 2008, forcing the company into a $162 million capital raising. While the company recovered US114 million in damages from its major customer Rizhao Steel Holding Group in 2010, the damage had been done.
We should note that Mount Gibson is unlikely to face the prospect of a capital raising this time around, with $484 million in cash sitting on its balance sheet at the end of December 2013.
Needless to say, investors may want to steer clear of the iron ore miners for now, but some other sectors may offer an opportunity…