BHP Billiton Limited (ASX: BHP) is on track to produce a record 217 million tonnes of iron ore this financial year and has its sights set on producing around 270 million tonnes in the coming years. With the commodity rapidly dropping in price however, the miner's CEO Andrew Mackenzie has admitted that his company's production could have been expanded too rapidly.
The iron ore market is currently facing a serious dilemma. The commodity's price has dropped to just US$94 a tonne after trading for an average US$135 a tonne throughout 2013. Worse yet, it is expected to continue its plunge over the coming 12 months to around US$80 per tonne as the world's largest producers, being BHP, Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Brazil's Vale continue to elevate their production rates. Unfortunately, demand for the commodity isn't growing anywhere near as quickly.
BHP's 217 million tonnes this FY compares with its production of just 170 million tonnes in 2013. Of course, the greater the production rates, the lower the cost per tonne produced (it is estimated its breakeven price is currently around US$45 a tonne), but its margins are being squeezed by the plummeting price. The oversupply is also putting enormous pressure on higher cost producers like BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX).
The combined effects of a slowdown in China's economic growth and increased supply has certainly left the market wary of a global oversupply and depressed prices over the long term. Although shares in each of the miners are trading at considerable discounts compared to the beginning of the year, the sector certainly hasn't earned my vote of confidence.
3 better bets than the Big Australian
BHP's shares have dropped 4.6% since the beginning of 2013 compared to the S&P/ASX 200 Index's (Index: ^AXJO) (ASX: XJO) 2.1% rise. While I like the company's future prospects, I still don't think now is a good time to be pressing the "Buy" button.
