Australia's mid-tier miners suffered another blow as the price of iron ore in the international market dipped 1.2 per cent on Thursday and went down to a five-year low of $85.70 per tonne.
But it isn't the worst yet since analysts at CLSA forecast the price of the key steel-making ingredient could further plummet to $75, reports Business Spectator. That lower price would likely be in mid-2015 when fresh supplies become available and demand from China continues to weaken, said CLSA analyst Ian Ropes in Shanghai.
At that price, the two biggest miners - BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) would still enjoy some profit based on their cost structure that places the breakeven benchmark at $50 per tonne. However, it would pressure the mid-tier mines like Atlas Iron whose breakeven is $80 and Fortescue Metal Group and BC Iron with $70 breakeven points.
Mark Pervan, ANZ head of commodities, explained that as the two giant miners flood the market with high quality iron ore, it would affect the supply-demand ratio and further expand that the smaller miners have to take with their lower quality product.
"The real issue for the Australian iron ore industry, particularly the big boys, is that it's the still the best deal in town for them. They're not prepared to give up market share in what is still their best performing asset," Pervan said, quoted by The Age.
Roper further warned that "The oversupply situation is only going to worsen over the next few years."
"It might be that the market is OK with that, but a downward trend doesn't allow for a recovery in price. Our view is that the housing market won't start recovering until the second quarter of next year, and that will be where it's bottoming," Pervan added.
The prospects are not too bright given that China's National Development and Reform Commission (NDRC) is even seeking further cut in prices of the commodity. "We should look for a new pricing model at a time when there are changes in the supply-demand dynamic and iron ore prices are entering a downward spiral," The Australian quoted NDRC Deputy Inspector Li Zhong Juan.