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Why BHP Billiton Limited and Rio Tinto Limited are the only place to hide for investors

Iron ore is pushing fresh five-year lows today after the spot price slipped a further 1.6% overnight to US$84.30 a tonne.

The bulk commodity has experienced a significant fall over the past year but some analysts think there could be further to fall with US$75 per tonne being touted as the next support level.

The worrying situation now is that many mid-tier iron ore miners are no longer profitable at these levels. According to research by broker UBS at current prices Atlas Iron Limited (ASX: AGO) is at break-even, while should the price fall towards US$75 a tonne then Fortescue Metals Group Limited (ASX: FMG) will only be break-even too.

Stick with the strongest

The chief executive of global mining giant BHP Billiton Limited (ASX: BHP), Andrew Mackenzie, is already on record as stating that he doesn’t expect the iron ore price to go back above US$100 a tonne. For investors, the days of investing in the smaller, higher cost miners could be past. Instead, investors are better off sticking with the lowest cost producers – BHP and Rio Tinto Limited (ASX: RIO) – which have production costs closer to US$45 a tonne.

Questions over Chinese economic strength

Adding to the pressure on iron ore miners is the general uncertainty surrounding the Chinese economy, particularly with regards to overbuilding of houses and infrastructure. With risks to the downside for China’s economy, the outlook for Chinese demand for not just iron ore but all commodities appears weakened.

For these reasons the diversified, lowest cost miners are by far the safest place to be in the face of headwinds for the long-term iron ore price.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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