Iron ore prices have fallen to decade lows…so two major Australian miners are applying to produce even more to sell into a depressed market.
Yes, this is April Fool's Day. No, this story is not an April Fool's Day joke.
Fortescue Metals Group Limited (ASX: FMG) and BHP Billiton Limited (ASX: BHP) are seeking approval to develop new mines in the Pilbara, according to The Australian. The two companies want to replace mines that will soon be depleted, but when you do the math, the new mines will have higher production capacities. The extra production seems to add up to a combined amount of 50 million tonnes per year.
That sounds pretty foolish when there is already too much floating around in the world as it is.
Iron ore commodity prices are near US$51 a tonne and are probably not going to stop there. The lowest-cost producers BHP and Rio Tinto Limited (ASX: RIO) can produce more and still have wiggle room to make a profit. However, junior miners don't have as much margin. Fortescue itself is feverishly trying to lower its production costs, but the highly leveraged company is straining.
A cyclical commodity market doesn't care about the players. Until increased demand sops up excess supply, prices are heading down. If the miners add to the pile of cheap ore, the companies with the biggest profit margins have the best chances to survive.
Fools don't need to play that kind of game. They should avoid battlefield industries and follow growing sectors like healthcare and financial services.
CSL Limited (ASX: CSL), the largest ASX-listed biopharmaceutical, has expanding overseas businesses where about 90% of its revenue is generated. It will be the second-largest influenza vaccine producer in the world and analysts forecast annual earnings to grow about 20% on average over the next few years. That's more attractive than iron ore any day!
FlexiGroup Limited (ASX: FXL) raised its half-year net profit 9% and is forecast to deliver similar earnings growth for the next couple of years. The company offers services like vendor finance, interest free and visa cards, as well as instalment payment plans. Providing for consumer finance is a steady income stream for FlexiGroup. The stock also pays a hefty 4.9% fully franked yield, which is attractive to dividend investors.
