The world's top three iron-ore producers continue to consistently churn out record volumes of output, worsening an already dire supply glut, but investors are now wondering just how long that strategy can last.
On Wednesday, BHP Billiton—the world's largest miner by market capitalization—reported a 7 percent annual rise in September quarter output to 61 million tons, adding to a 6 percent gain in the June quarter, and maintaining its full-year guidance of 247 million tons.
Report cards over the past week confirms other miners are also in high-output mode.
Rio Tinto reported a 12 percent annual rise in third-quarter production to 86 million tons, building on a 9 percent gain in the previous quarter. The world's second largest miner also announced it was on track to meet a full-year target of 340 million tons. Meanwhile, Brazilian giant Vale logged a record performance, with output up 2.9 percent on year to 88.2 million tons and more increases to come.
A low cost of production has been the secret to miners' profitability despite iron ore prices crashing to $52 a ton from nearly $200 four years ago. Rio Tinto's unit cash production cost at its Pilbara operation fell to $16.20 a ton during the first half of this year, from $20.40 per ton during the same period last year, while Vale plans to reduce its current unit cost from $15.80 per ton to less than $13 by 2018, according to the companies.
But if miners continue ramping up production at high levels, it could become counterproductive.
"So far, miners have been able to withstand commodity price declines but if they keep pushing prices down, and testing the low cost producer-price relationship, margins and cash flow will eventually decline and they'll get to a point where they can't escape by cutting costs further," explained David Lennox, resources analyst at market research firm Fat Prophets.
If prices fall below the average variable cost of production, companies may be better off shuttering factories in the short-term.