Here's what every ASX investor needs to know about iron ore

In reality, not even BHP Billiton Limited (ASX:BHP) or Rio Tinto Limited (ASX:RIO) are safe.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China's growth is slowing at a rapid clip, and for some reason that seems to come as a surprise to many Australian investors.

To put China's evolution into perspective, it might surprise you to learn that China used a massive 6.6 gigatons of cement between 2011 and 2013. In contrast, the United States used just 4.5 gigatons in the entire 20th century!

making-the-modern-world-cement-A_800_v2

Source: Gates Notes – The blog of Bill Gates

What is perhaps even more shocking is the way this development was funded. Between 2007 and 2014, China's debt ballooned out from $7.4 trillion to an astonishing $28.2 trillion in 2014, all of which must be repaid.

By looking at those numbers alone, it is clear that growth like that cannot be sustained, and it seems only now that investors are beginning to realise it.

Just last week, the Chinese government released fresh economic data which forecast economic growth of just 7 per cent in 2015. That compares to the 7.4 per cent growth recorded in 2014, which was the nation's slowest growth rate in nearly a quarter of a century.

Alarmingly, this even prompted the government to proclaim slower economic development as the "new normal" after having clearly gotten ahead of itself in its expansion plans.

Of course, this is a huge problem for Australia's miners, who have played an instrumental role in driving China's economic growth over the years. While Chinese demand is responsible for roughly two-thirds of the world's seaborn iron ore, a slow-down in production will lead to a slow-down in demand, forcing the commodity's price lower.

Unfortunately, demand-side concerns are only one of the issues facing our miners …

At the same time as demand growth is diminishing, the world's largest iron ore miners are heavily ramping up their production rates in order to improve economies of scale and force weaker competition from the market.

In fact, another shipping record was recently broken at Pert Hedland's port whereby 35.6 million tonnes of iron ore were shipped in February. According to data from the port authority, that represents a total of 1.27 million metric tonnes shipped daily, surpassing the previous high of 1.21 million tonnes recorded in September last year.

This tidal wave of fresh supplies is also having a deadly effect on the commodity's price. Just last week, it fell below US$60 a tonne for the first time in nearly six years and analysts widely believe it will continue to slide for the remainder of 2015.

While BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: BHP) have the ability to cope with the lower price environment given their low costs and, in BHP's case, greater diversification, other miners are on the brink.

Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI), for instance, operate on higher costs and could be forced from the market should the iron ore price fall a lot further. This is especially the case given their lower quality ore which, in turn, attracts an even lower price than the ore produced by the majors.

Even Fortescue Metals Group Limited (ASX: FMG) is under pressure right now. Although it is Australia's third largest miner, it carries an enormous pile of debt which will become increasingly difficult to repay the further the commodity retreats in price.

What this means for you

The shares of iron ore miners have been hammered over the last 15 months, over which time the commodity's price has itself fallen more than 56 per cent from US$135 a tonne. While many investors are hopeful of a sudden rebound in prices, it would seem unlikely given the economic forces currently at play.

As such, investors should avoid the temptation to buy shares in the junior miners in the hope of making a quick profit. As it stands, some of them may struggle to continue as a going concern beyond this year.

Even the bigger miners present as a risk. While they are better equipped to cope with lower prices, their cash flows are still under pressure which could see their shares fall further over the next 12 months.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »