Iron ore fell to its lowest price in a decade overnight, capping off what proved to be its worst quarterly performance since at least 2009.
According to data from the Metal Bulletin and reported by the Fairfax press, the commodity plunged US$1.34 to just US$51.35 a tonne which is its lowest price since 2004-2005. Following on from a horrendous year in 2014, the commodity’s price deteriorated a further 28% during the March quarter, marking its fifth consecutive quarter in the red (it has fallen 62% since January 2014).
Source: Index Mundi
The slide in iron ore prices has been caused by a major slowdown in demand from China which is on track to record its slowest annual growth rate in nearly a quarter of a century, exacerbated by a tidal wave of fresh supplies from the world’s largest producers. BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Vale have all confirmed they will continue to pursue their lofty production targets, much to the dismay of higher cost miners including Arrium Ltd (ASX: ARI) and BC Iron Limited (ASX: BCI).
Even Fortescue Metals Group Limited (ASX: FMG) has come under enormous pressure. At its current price, it’s possible that Australia’s third largest iron ore miner is operating at a loss, while it would be making wafer-thin margins at very best. The miner has approximately US$8.8 billion of debt on its balance sheet – much of which will fall due between 2017 and 2019 – which could become impossible to repay if the iron ore price falls any lower.
Where to now?
Unfortunately, there is a very good chance that prices will continue to deteriorate. As supply growth continues to (heavily) outweigh demand growth, prices will continue to fall lower and lower. In fact, a number of analysts have forecast the commodity to drop below US$50 a tonne, while some suggest it could fall closer to US$40. With such strong headwinds, investors would be wise to steer well clear.
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