The outlook for the embattled iron ore industry is looking even bleaker after the Fairfax press reported an industry expert predicted prices would fall into the US$30's per tonne range at some point this year.
Iron ore fell 2.1% overnight to just US$61.20 a tonne, according to the Metal Bulletin, which is its lowest price since May 2009. At its current price, the commodity has dropped an incredible 55% since the beginning of 2014, but could fall much further as the year goes on.
While many analysts have given the commodity a forecast range of somewhere between US$50 and US$70 a tonne, Andy Xie, a Shanghai-based independent economist, has forecast it to fall as low as US$30 this year as supply continues to rise while global demand falls. As quoted by the Fairfax press, Xie said: "We need to see prices much lower. It can still go down through US$40 before we bounce back."
Indeed, the world's largest miners are highly unlikely to back down from their lofty supply targets which will continue to force prices down in a low-demand environment. The price is expected to continue plummeting until such time that high-cost producers are squeezed from the market, leaving only the strongest and most efficient.
While companies such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are feeling the pinch in regards to tighter margins and cash flows, it's the industry's high-cost and highly leveraged companies that could really struggle if the price continues to drop. Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI), for instance, are in real danger of being squeezed from the competition, while even Fortescue Metals Group Limited (ASX: FMG) runs the risk of losing profitability.
If iron ore does fall as low as Xie expects it to, the impact on Australia's miners could be enormous. Whether it falls that low or not remains to be seen but one thing is for sure, I wouldn't want to be caught holding mining shares if it does. With interest rates sitting low, I'd much prefer to be putting my money to work in some of the market's best high-yielding stocks.
