How Low Can Iron Ore Prices Go from Here?

(Continued from Prior Part)

Iron ore prices above $45 per ton should motivate even major iron ore miners to accelerate their brownfield expansions so as to fully optimize their infrastructure. BHP Billiton (BHP) and Rio Tinto (RIO) are among those producers.

The sustainable iron ore price should not provide an incentive to miners to increase their capacities any further than were planned in the iron ore boom era. This is especially true in the face of declining demand growth.

Based on current iron ore cost structure, $45 should be sustainable, downside risks being the further acceleration in cost-cutting by miners. Upside risks mainly relate to higher-than-expected demand growth from China.

This could be spurred by the Chinese government’s efforts to kick-start the economy by further devaluation or easing measures. Any major capacity curtailment, particularly from Roy Hill or Vale, could also lead to an upside.

China’s steel demand has more or less peaked, so among the iron ore miners, it would be basically about the survival of the fittest. As we’ve discussed previously, BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) are among the lowest cost producers with a strong balance sheet position. After the completion of capacity expansion by Vale SA (VALE), it would be the lowest cost producer, and the capital expenditure needed for the completion of project could lead to near-term pressure on the company’s stock price.

Fortescue Metals Group (FSUGY) needs to further lower its cost structure to sustain in the long term, especially given its debt commitments. Meanwhile, Cliffs Natural Resources’ (CLF) would need to find buyers for its non-core assets and reduce its leverage to survive the downturn. Investors need to note that Cliffs’ major market is the United States, which is not to become directly impacted by the seaborne trade.

BHP and RIO form 7.2% of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings.

Browse this series on Market Realist:

• Part 1 - What is Driving the Iron Ore Miners’ Stock Price Performance?
• Part 2 - Decelerating Chinese Steel Production Concerns Iron Ore Miners
• Part 3 - Can China’s Slowing Domestic Iron Ore Output Aid Iron Ore Miners?