Iron is one of the most abundant rock-forming elements, constituting about 5 percent of the Earth’s crust. It’s the fourth-most abundant element after oxygen, silicon and aluminium, and after aluminium, the most abundant and widely distributed metal.

Iron ores are rocks from which metallic iron can be economically extracted. These rocks are usually found in the form of hematite or magnetite. About 98 percent of world iron ore production is used to make steel.

Iron is indispensable to modern civilization, a thesis demonstrated in real time via the massive infrastructure build-out still underway in China. And iron ore–due to Australia’s proximity to the Middle Kingdom as well as its abundant reserves–is now the Land Down Under’s key export commodity.

Australia’s Economic Demonstrated Resources (EDR) of iron ore are around 28 billion metric tons, with Western Australia accounting for about 98 percent of the total. Most of Australia’s iron ore is mined in the Pilbara region of Western Australia.

Based on figures published by the United States Geological Survey (USGS) and the latest Australian resource figures, world EDR of iron ore totals 168 billion metric tons, with Australia accounting for 16.7 percent, just behind Ukraine with17.9 percent and ahead of Russia with14.9 percent, China with 13.1 percent and Brazil with 9.5 percent.

China is the largest iron ore producer, followed by Australia, Brazil and India. China is also the world’s largest iron ore importer.

For several years now analysts have forecast significant declines for the price of iron ore. To be sure, a correction in the market has been unfolding since the benchmark price for the element peaked in late 2011, with the average annual price lower each year since.

Analysts expect 2014 to be a particularly difficult one for iron ore and the companies that produce it, despite the fact that the decline thus far has been relatively slow and manageable.

Indeed, the strength of Chinese iron ore demand confounded analysts last year, with 2013 imports rising 10 percent year over year to 820 million metric tons as steel mills defied expectations with an 8 percent rise in output.

And there are some analysts whose forecasts suggest that consensus expectations for Chinese steel demand and production are too low, that China’s steel production won’t peak for another decade due to continued demand from growing cities.

The certainty of China’s rampant growth during the first years of the 21st century has given way to questions about the shape of future demand, as policymakers in what’s now the world’s second-largest economy attempt to engineer a transition from a an investment-led to a consumption-led growth model.

This will eventually lead to reduced demand for commodities such as iron ore, as infrastructure and home-building taper and emphasis shifts to soft commodities that help satisfy maturing appetites and the provision of services such as education, money management and health care.

For now, however, China’s demand for iron ore seems insatiable. Every time its hunger wanes there’s a new burst of construction activity that sucks in ever more ore. Volumes shipped to China will quite likely double from 300 million metric tons in 2008 to 600 million metric tons in 2014.

The ride will continue to be adventurous. In late 2012 iron ore dove from USD140 per dry metric ton to USD87. But during 2013, as Chinese demand surged on a mini-stimulus package that pushed its growth rate back above 8 percent, iron ore averaged USD135 for the year.

Thus far 2014 has been a downer, with benchmark iron ore slipping from USD135 to USD123 as of this writing.

The most important factor in the iron ore market remains China’s business cycle. Recent history shows that strong growth in China has been directly correlated to strong iron ore imports because the Middle Kingdom takes in more than 60 percent of seaborne ore.

There are key developments that suggest China will slow this year from 8 percent-plus growth to the low 7 percent neighborhood. The People’s Bank of China is tightening credit to prevent a shadow banking system from spinning out of control. And fiscal stimulus measures are winding down, with the pipeline of projects getting slimmer.

These are elements of China’s effort to “rebalance” its economy, in favor of consumption rather than investment.

At the same time, what was for years a market in short supply of iron ore is turning, despite major cutbacks in capital investment plans by global miners. Analysts project the iron ore market will be in surplus approaching 100 million metric tons in a total seaborne market of 1 billion metric tons.

But expensive Chinese iron ore production is forecast to cease as cheaper Australian supply emerges. The concentration of ownership of reserves in Australia’s key Pilbara region will help producers in terms of pricing.

Potential oversupply, and the costs already incurred to create it, means that production must be shipped, and this could weigh on prices.

There is another part of the iron ore pricing equation that must be considered: Even as demand is slowing along with China’s rebalancing act, Chinese steel mills and ports have ample iron ore supplies. A Chinese destocking event could lead to a significant decline for iron ore prices.

Each time that’s happened in the past the price has subsequently recovered a few months later.

Of course there are a great many uncertainties at work here, chief among them China’s growth rate and the speed of its economic transition. But there’s little doubt that the direction of the iron ore market will have a significant impact on Australia.

Below we take a look at iron ore producers in the AE How They Rate coverage universe and how they may or may not fit within investors’ portfolios.

Big Ore

The three largest producers in the Pilbara–Aggressive Holdings BHP Billiton Ltd (ASX: BHP, NYSE: BHP) and Rio Tinto Ltd (ASX: RIO, London: RIO, NYSE: RIO) and Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY)–are also the lowest-cost producers in the region.

That provides the best defense against a decline in iron ore prices that according to analysts could be from the USD135 per dry metric ton average of 2013 to a long-term average of USD80 to USD90.

BHP and Rio are also diversified commodities producers, limiting their exposure to a potentially rough iron ore market. Their primary virtue, however, is scale. A downturn for a single commodity won’t irreparably harm them.

And even with a steep slide for iron ore, which remains the top output for both BHP and Rio in terms of share of overall volume produced, their cost structures mean they’ll still be able to generate solid earnings.

All three of the big Pilbara three are coping with substantial debt piles, though trends are positive. Fortescue, which faced a near-death experience with the 2012 iron ore price collapse, has the most precarious situation, though even it has gotten back to dividend growth with a healthier commodity market.

BHP, the biggest mining and resources company in the world, reported strong fiscal 2014 first-half performance in its quarterly operational review released Jan. 22, 2014. Management noted company production records across 10 operations and three commodities and reiterated full-year guidance maintained for its petroleum, copper and coal units as well as its iron ore business.

Output from the Western Australia Iron Ore (WAIO) unit reached a company-record 108 million metric tons, benefitting from the early delivery of first production from the Jimblebar mine.

Iron ore production attributable to BHP increased by 19 percent in the six months ended Dec. 31, 2013, to a record 98 million metric tons.

Production guidance for WAIO was maintained at 212 million metric tons. The ramp-up of phase one capacity at Jimblebar to 35 million metric tons per annum (MMmtpa) is expected to be completed by the end of fiscal 2015.

Management also noted a longer-term, low-cost plan to expand Jimblebar to 55 MMmtpa as well as a broader debottlenecking of the supply chain that it expects will underpin further capital-efficient growth in capacity to approximately 260 MMmtpa to 270 MMmtpa.

Total volumes across all commodities are expected to grow by 16 percent over the two years through the end of fiscal 2015.

BHP’s capital and exploration expenses for fiscal 2014 will be USD16.1 billion, down from USD22 billion for fiscal 2013. The company received USD2.2 billion from asset sales during the December half.

Management’s emphasis is on productivity, and BHP is enjoying solid momentum into the latter half of the current fiscal year. Efforts to streamline its portfolio, to reduce costs and to boost efficiency should drive substantial growth in free cash flow and better returns for shareholders.

BHP will report full operating and financial results for the first six months of fiscal 2014 on Feb. 18, 2014.

BHP Billiton is a buy under USD40 on the Australian Securities Exchange (ASX) using the symbol BHP. BHP’s New York Stock Exchange (NYSE) listing is an American Depositary Receipt (ADR) that represents two ordinary, ASX-listed shares. BHP is a buy under USD80 on the NYSE using the symbol BHP.

Rio Tinto, meanwhile, announced a 15 percent dividend increase to USD1.92 after posting better-than-expected underlying earnings of USD10.2 billion for 2013.

Management noted that operating cash cost improvements of USD2.3 billion exceeded the 2013 target of USD2 billion, while exploration and evaluation savings delivered USD1 billion against the 2013 target of USD750 million. Management’s efforts to streamline the business have clearly been effective.

Capital expenditure was down 26 percent to USD12.9 billion.

Rio Tinto cut net debt to USD18.1 billion as of Dec. 31, 2013, from USD19.2 billion as of Dec. 31, 2012.

At the same time, Rio Tinto set company production records for iron ore, bauxite and thermal coal and noted a strong recovery in copper volumes.

Iron ore volumes were bolstered by the completion in August 2013 of the Pilbara phase one infrastructure expansion to 290 million metric tons per annum, with the ramp-up on track to reach nameplate capacity before the end of the first half of 2014.

Net earnings of USD3.7 billion reflect non-cash charges of USD2.9 billion and impairments of USD3.4 billion, notably the impairment of a previous non-cash accounting uplift on first consolidation of Oyu Tolgoi, a project overrun at Kitimat and the previously announced curtailment of the Gove alumina refinery.

Cash flows from operations were up 22 percent to USD20.1 billion, supporting the solid dividend increase.

Rio Tinto is a buy under USD65 on the ASX using the symbol RIO.

Rio Tinto’s NYSE listing is an ADR that represents one share of the company’s London listing. Rio’s ADR–which also trades under the symbol RIO–is a buy under USD62.

Fortescue, the largest pure play on iron ore, posted fiscal 2014 second-quarter shipments of 26.7 million metric tons, up from 19.1 million a year ago. CEO Neville Power recently noted that demand for iron ore will remain “strong” on Chinese steelmaking.

Cash costs and realized prices were both better than forecast, and net debt of USD8.6 billion as of Dec. 31, 2013, was down from USD10.5 billion as of June 30, 2013.

Management revised downward its fiscal 2014 shipment guidance to 127 million metric tons from a prior range of 127 to 133 million metric tons due to minor issues at several projects. But Fortescue is still on track to exceed consensus estimates for annual output.

The CAPEX budget has bumped out by USD200 million to USD2.1 billion, though it shouldn’t have too much of an impact on cash flow.

From a longer-term perspective, Fortescue is on track to achieve an annual run rate of 155 MMmtpa by the end of March. Ongoing efforts to strengthen the balance sheet and a strong production growth profile make it a solid bet for aggressive investors.

Management will report full financial and operating results for the half-year on Feb. 19.

Fortescue Metals is a buy under USD4.50 on the ASX using the symbol FMG and on the US OTC market using the symbol FSUMF.

Fortescue also trades as an ADR on the US OTC market under the symbol FSUGY. Fortescue’s ADR, which is worth two ordinary, ASX-listed shares, is a buy under USD9.

Small Concentration

Mount Gibson Iron Ltd (ASX: MGX, OTC: MTGRF, ADR: MTGRY), with operations focused in the Mid West and Kimberley areas of Western Australia, is much smaller than the major Pilbara producers. Its costs are higher and the life of its mines doesn’t match their multi-decade stuff.

But near-term protection against a downturn for iron ore prices is provided by a strong cash balance of AUD484 million, approximately AUD0.44 per share. And Mount Gibson has minimal overall debt outstanding, with no maturities over the next two years.

Mount Gibson has been paying an annual dividend of AUD0.04 since 2011, which based on a Feb. 14 closing price of AUD1.18 on the ASX equates to a yield of 3.4 percent.

It’s possible that management could boost the dividend, putting some of the cash hoard back to shareholders. And it’s possible that management could pursue an acquisition that extends its mine life.

Its record demonstrates that Mount Gibson prefers smaller deals that help it leverage its existing infrastructure position in the Mid West, which limits risk.

And if the decline forecast by the most bearish of iron ore analysts materializes Mount Gibson will be in good position to scoop up distressed juniors looking to cut deals on iron ore assets that didn’t go into production during the early 21st century boom.

What’s clear is that Mount Gibson’s cash position and balance sheet provide ample protection for the current dividend rate as well as significant flexibility to extend production life via opportunistic acquisitions.

Mount Gibson reported expectations-beating fiscal 2014 second-quarter iron ore sales of 2.5 million metric tons (MMmt) versus 2.67 MMmt a year ago. First-half sales, meanwhile, were a company record 5.1 MMmt. And management reaffirmed full-year sales guidance of 9 to 9.5 MMmt.

Mount Gibson is a buy under USD1 on the ASX using the symbol MGX and on the US OTC market using the symbol MTGRF.

Mount Gibson also trades as an ADR on the US OTC market under the symbol MTGRY. Mount Gibson’s ADR, which is worth 10 ordinary, ASX-listed shares, is a buy under USD10.

Atlas Iron Ltd (ASX: AGO, OTC: ATLGF) is another relatively small producer sitting on a significant cash balance, AUD389 million as of Dec. 31, 2013. Atlas has more overall debt than Mount Gibson but has no maturities before 2017.

Management recently noted that the falling Australian dollar has boosted margins by 20 percent to 25 percent. And CEO Ken Brinsden doesn’t expect iron ore prices to be “stressed” in fiscal 2014, underlining the positive impact the company sees from the weaker domestic currency.

Atlas recently boosted its fiscal 2014 iron ore shipped guidance to 10.2 to 10.7 MMmt from 9.8 to 10.3 MMmt, as second-quarter shipped volumes were  up to 2.7 MMmt from 2.4 MMmt a year ago.

Atlas Iron is a speculative buy for aggressive investors on the ASX using the symbol AGO and on the US OTC market using the symbol ATLGF up to USD1.

Atlas Iron also trades as an ADR on the US OTC market under the symbol AGODY. Atlas Iron’s ADR, which is worth five ordinary, ASX-listed shares, is a buy under USD5.

Production and Service

AE Portfolio Aggressive Holding Mineral Resources Ltd’s (ASX: MIN, OTC: MALRF, ADR: MALRY) core mining services operations that are tightly tied to iron ore production as opposed to exploration and development are complemented by a growing iron ore production capability.

Management reported that revenue for the first six months of fiscal 2014 grew by 86 percent to a company-record AUD928.4 million.

Earnings before interest, taxation, depreciation and amortization (EBITDA) were AUD305.1 million, up 110 percent from the prior corresponding period. Net profit after tax (NPAT) was AUD130.4 million, up 107 percent.

Operating cash flow for the period was up 294 percent to AUD367.6 million.

Mineral Resources “extinguished” net debt in January 2014 and now carries a significant cash balance.

Management attributed the astounding growth numbers to consistent performance for its mining services business and a 90 percent increase in iron ore volumes shipped at better prices.

Contracting volumes remained robust in the period, although forward crushing volumes will be impacted by the exit from Christmas Creek due to Fortescue exercising its option to buy two on-site facilities formerly operated by Mineral Resources’ Crushing Services International unit.

The other mining services activities, including PIHA, accommodation and materials handling, continued to provide solid contributions.

Mining operations benefitted from the continued improvement in production from existing mines and the introduction and consolidation of new mines at Phil’s Creek and Spinifex Ridge.

All that fueled an interim dividend of AUD0.30 per share, up from AUD0.16 a year ago.

Mineral Resources is a buy under USD11 on the ASX using the symbol MIN and on the US OTC market using the symbol MALRF.