Iron ore price hits unwelcome 5-year-low

Iron ore price hits unwelcome 5-year-low

After flirting with a five-year low for about a month, the iron ore price has finally hit levels seen last in October 2009 over worries about slowing demand in China and a glaring oversupply in the market.

The price has fallen by more than 35% this year, having one of it worst run in August. Benchmark Australian ore tumbled from around $95 a tonne at the start of August to $85.70 a tonne on Wednesday, down more than 1% from the $86.70 closing mark in the previous session, the Steel Index figures show.

The drop is not only affecting the top producers stocks, but also seriously damaging the economy of commodity dependent regions, such as Western Australia. According to the state’s main newspaper, every dollar fall in the average iron ore price costs the State Budget A$49 million in lost revenue:

The Budget forecast iron ore to average US$122.70 a tonne through 2014-15. At current trends, it will have to average well over US$140 a tonne for the rest of the year to deliver on the Budget forecast.

The big three global producers —Rio Tinto (ASX:RIO), BHP Billiton (ASX:BHP) and Vale (NYSE:VALE), which all depend heavily on iron ore for their profitability, are largely responsible for the price slump. They are spending billions of dollars ramping up output to meet anticipated future demand, and capture market share, while pushing the global market into surplus.

High-cost miners to leave market

Their actions, experts agree, will force high-cost Chinese miners out of the market, which in turn will stabilize iron ore prices, lifting them back towards $100 a tonne.

But it is also causing collateral damage. Mid-cap Australian iron ore miners are already feeling the pressure, as current prices will barely let them break even.

According to UBS estimates, published by The Sydney Morning Herald, Australian miners Grange Resources (ASX:GRR) and Gindalbie Metals (ASX:GBG) are facing uneconomic production, with break-even prices of $87 a tonne and $98 a tonne respectively.

Atlas Iron (ASX:AGO) and Arrium (ASX:ARI) are next in the firing line with cash costs over $80 a tonne.