Recent headlines may be pointing toward even more iron ore troubles for Fortescue Metals Group Limited (ASX: FMG). Iron ore prices hang precariously in the mid-US$50s range per tonne and further lack of Chinese demand could send the commodity down.
The Australian Financial Review reported Fortescue CEO Andrew Forrest saying the major iron ore producers should now cap production to support prices. Though this may sound like a solution, I don't imagine BHP Billiton Limited (ASX:BHP) and Rio Tinto Limited (ASX: RIO) will join this chorus since their main objective is to produce ore at the lowest cost to protect and increase market share.
They are not as leveraged as Fortescue in debt and their focus is on the long game. Earlier this month, Fortescue halted an attempt to raise funds through a bond issue when the outcome looked unfavourable. Then several days ago, Fortescue management said they would be open to outside investment in its mines. The company needs to secure funding to cover debt coming due in the next few years.
Asking other miners to hold up increasing iron ore production seems more self-serving than an effort to save the industry as a whole. Commodity busts are not pretty. Usually weak companies are shaken out, but financially strong ones survive.
You should only invest in the market leaders of a commodity industry in a downturn because they have the largest profit margins and therefore are the lowest-cost producers.
Don't let Fortescue's low share price and 7.2% dividend yield tempt you. In fact, I wouldn't suggest any Foolish investor be in this industry at all when it is a battlefield market.
As an investor, you can pick much easier stocks that are growing and profitable like Slater & Gordon Limited (ASX: SGH), which operates a network of law practices that specialise in personal injury law. It raised its financial year 2014 earnings 32% and analysts expect earnings to grow over 15% annually in the next several years as it expands its business across Australia and in the UK.
Warren Buffett, the billionaire investor, once said about staying away from problem companies, "We've done better by avoiding dragons rather than by slaying them."
