Investors in Australia's embattled iron ore sector have finally been offered some reprieve after the commodity ended its seven-consecutive-sessions decline.
After falling to a new decade low of US$46.70 a tonne earlier in the week, the steel-making ingredient managed to edge 2% higher to US$48.06 a tonne overnight, according to data from the Metal Bulletin.
Unfortunately however, it appears that any recovery may be a case of too little too late. The commodity's spectacular crash over the last 16 months may have claimed its first major scalp yesterday with Atlas Iron Limited (ASX: AGO) is entering a voluntary suspension from trade, citing a review into its "operations, financial outlook, asset sale opportunities and capital structure in light of the recent rapid fall in the iron ore price."
Fellow junior miners BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) also plummeted on the news with investors clearly concerned that those two companies might not be far behind.
The fact is that not many miners are capable of surviving at these depressed levels. With the exception of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale, virtually every other mining company that produces iron ore will be operating at a loss. That includes the world's fourth largest producer, Fortescue Metals Group Limited (ASX: FMG) – although it is sitting on a significant pile of cash that will help it survive longer than most other miners. Overall though the outlook is certainly bleak for investors left holding its dwindling shares.
Where to now?
The announcement from Atlas Iron yesterday shows that we have reached a critical point in the industry cycle. High cost producers are at risk of being squeezed from the market, while the world's bigger players are also recognising thinner margins, with their cash flows and profitability coming under significant pressure.
While BHP Billiton and Rio Tinto have both confirmed they will continue to pursue their lofty production targets and flood the market with supplies that are simply not required, which will only force prices lower. While more blood is likely to be spilled, investors would be advised to stay away from the sector altogether.
