Iron ore investors, take note:
The commodity's price will find a new normal "well below US$50 a tonne" over the coming years, with no light at the end of the tunnel for those exposed to the sector.
That's the message from BHP Billiton Limited's (ASX: BHP) own vice president of marketing for iron ore, Alan Chirgwin. According to The Australian Financial Review, Chirgwin said the commodity's price would hover around the highest breakeven of one of the world's biggest miners, suggesting a potential catastrophe for some of the world's higher cost producers.
As it stands, a number of those miners are likely struggling to earn a profit at the current price. If it weren't for the weak Australian dollar, some of Australia's own miners would probably already be operating at a loss.
But it's not just them that are in danger.
According to the AFR, Fortescue Metals Group Limited (ASX: FMG) is sitting on a breakeven price of around US$37 a tonne while it costs the Brazil-based Vale roughly US$40 to produce each tonne. If the commodity fell to either of those levels, it would become increasingly difficult to repay debt with both companies relying on further cost improvements or perhaps asset sales to stay afloat.
BHP Billiton and Rio Tinto Limited (ASX: RIO) aren't immune, either. Although both companies maintain considerably lower breakeven prices than Fortescue or Vale, both face the tough reality of tighter margins and dwindling earnings. If I was a shareholder, I wouldn't want to rely too heavily on their progressive dividend policies, either.
Unfortunately, BHP Billiton isn't alone in thinking the iron ore price has further to fall. It's currently sitting at a near four-month low of US$49 a tonne with many analysts assuming it will hit US$40 (or lower) sometime in 2016.
At this point, I wouldn't be willing to bet against them…
