Citigroup - bleak outlook for Iron Ore

There is no relief in sight for struggling iron ore miners, with Citi tipping the iron price will fall below $US60 a tonne in late 2015.

In a note today, Citi downgraded its average forecast to $US74 a tonne in the first quarter of 2015, sliding even further to an average of $US60 a tonne in the third quarter. 

Citi said it expects the iron ore price will briefly dip below $US60 a tonne.

The group is eyeing an annual average price of $US65 a tonne in both 2015 and 2016. 

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently hovering around five-year lows, touching its lowest point since June 2009 last week at $US75.50 a tonne.

The iron ore price has now lost 45 per cent in 2014.

Citi said while the decline in the iron ore price in the first half of the year was due to increased supply, the current sell-off is being driven by deteriorating demand and deleveraging of traders and Chinese mills.

The group also said it expects Chinese steel demand to weaken further in early 2015.

Below is a chart showing the cost of production of the large Australian miners, who are likely to be able to weather this price downturn.  (Source Fat Prophets)

Clearly investors will not want to be exposed to iron ore producers with a cost of production greater than the current prices.

Care should also be taken investing in mining services businesses, given the pressure on mining companies to cut costs while commodity prices remain soft.