Tension is rising for high-cost iron ore miners around the world after the steelmaking ingredient dropped to its lowest price in five years. After having traded at US$135 a tonne at the beginning of the year, the commodity fell a further 1.2% overnight to just US$85.70.
While recent pressure has come from a slowdown in demand for housing in China, it is also coming from a tidal wave of new supplies from the world’s largest miners, including Australia’s own BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). All of these companies operate low cost mines and are ramping up production levels to offset declining prices.
Although those three miners have the capacity to still turn a healthy profit at these prices, other miners around the world have been forced to close or suspend their operations. Fears are also rising over the future of certain Australian miners which operate at far higher costs than the big miners mentioned above. Should the iron ore price drop any lower, companies such as Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) will come under substantial pressure.
What should investors do?
Investors hoping to make some enormous profits on iron ore miners that have been heavily sold down may want to think again. While a recovery in the iron ore price would likely see shares rise in the near term, most analysts are bearish on the commodity. In fact, some have even suggested it could drop as low as US$75 per tonne, which would likely see shares fall much, much further.
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