The spot iron ore price continued its slide overnight, dropping a further 1.6% to just $78.88 a tonne. The fall has once again brought the controversial strategies being undertaken by BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) under the spotlight.
Already, the steelmaking ingredient has fallen more than 40% in value since the beginning of the year. While some investors are eagerly waiting for a recovery, most analysts fear there could be even further falls ahead as Chinese demand continues to wane and global supplies continue to climb.
In an attempt to reduce relative costs by improving economies of scale, BHP and Rio Tinto are both heavily ramping up their supplies. In fact, earlier this week BHP Billiton announced its plans to not only reduce its cost per tonne by 25%, but also to increase its annual production rate from today's 225Mt to 290Mt by 2017.
While shareholders of BHP could benefit from this strategy in the long run, such a strategy will also endanger hundreds of iron ore miners around the world – many of which operate in Australia. If the big miners do increase supplies even further, the commodity's price will continue to slide which will have many smaller miners operating at a loss. So far, we've already seen two local miners fall into administration, being Termite Resources and Western Desert Resources.
The strategy has also been slammed by Western Australia's Premier Colin Barnett, who blamed falling iron ore royalty income and lower GST revenue for the pain being experienced in the state's public sector. The higher volumes have not been enough to combat the falling price which has reportedly left a $2 billion hole in the state's forecast revenue.
Should you buy BHP Billiton today?
With the stock now trading at just $32.24 – its lowest price since July 2013 and down nearly 19% since late August – investors are wondering whether now is the time to buy. After all, BHP is one of Australia's strongest companies and is the safest miner, given its high level of diversification.
As much as I like the company however, I believe investors should continue to hold-off from buying the stock. Given the high level of volatility blanketing the sector (and the entire market, for that matter), I believe the miner's shares could continue to fall in the near term, meaning investors who wait could be presented with a more attractive point of entry.
