China’s CFR 62% iron ore prices
China’s CFR (or cost and freight) 62% (iron content) iron ore prices—the benchmark—have dived to $81.7 per ton, which is a 39.5% fall year-to-date (or YTD). The supply glut and weaker demand factors, which have been discussed previously, led to this fall in price.
Investors may want to know which iron ore names are doing better than others and why. We’ll answer that question now.
The performance of iron ore names year-to-date
BHP Billiton (BHP) is doing the best among all the iron ore names, which is down just 6.6% YTD (or year-to-date). Rio Tinto (RIO) is down 9.8%. Vale SA (VALE) is down 13.8%. The pure plays and mid caps like Fortescue Metals Group (FMG) and Cliffs Natural Resources (CLF) were down 33.7% and 45.8%, respectively.
Why bigger is still better
Biggies like BHP, RIO, and VALE are doing relatively well in this price environment compared to other names mainly because of the strength of their cost profiles. For these three players, owing to economies of scale, the breakeven point is between $45 and $60 per ton, which gives them a cushion at the current levels. But if prices remain below $80 per ton for longer, they’ll also start feeling more pressure on their cash flows.
Cash flow tightening was the main reason BHP and RIO deferred the capital management, which was expected by the market during their results ending June. Click here to learn more about the cost curve for iron ore miners.
Diversification also shields players like BHP and RIO from a downward spiral in a single commodity. But investors need to note that even for BHP and RIO, increasing contribution is coming from iron ore sales, making them more sensitive to iron ore market dynamics.
For pure plays and smaller players like FMG and CLF, the margin cushion left is too low at the current levels, making them much more sensitive to iron ore prices. CLF has company-specific issues like activist problems and acquisitions gone wrong, which have added fuel to the fire.
Note: ETFs, like the SPDR S&P Metals and Mining ETF (XME), are good ways of getting exposure to this sector without picking individual companies.