Iron, or...?

The price of iron ore is down by a quarter since its all-time high in 2011. Some of that fall is likely to be reversed fairly soon - the springtime construction season is beginning in China, which consumes about 60 per cent of the world's shipped ore. But even at the current price, efficient miners are running operating profit margins around 50 per cent. That should be too high for investors' comfort.

Those high margins mean the mining industry could be renamed the iron ore industry. The commodity accounted for about 63 per cent of the big five miners' operating profit in 2011, UBS estimates, up from 19 per cent a decade ago. Leave out Xstrata, which lacks an iron ore business, and the figure is even higher.

Of course, a decade ago, a tonne of the stuff went for about $20 - at the low end of a century-long $20-40 range (after adjusting for inflation, according to UBS). Some increase was necessary to make massive new investments profitable, but something much lower than today's $140 would serve that purpose.

The massive price increase has nothing to do with fundamental scarcity. There are abundant high-quality deposits close to the earth's surface. Global production grew at a 7 per cent annual rate over the past 10 years (the rate for oil and gas is more like 2 per cent). Miners can keep up the pace. BHP Billiton and Rio Tinto are well on the way to adding more than 300 million tonnes of new annual iron ore production over the next decade - equivalent to about 30 per cent of current global seaborne trade.

Up to now, rampant Chinese demand has more than matched that new supply and years of global monetary ease have turned a small deficit into a profit bonanza for miners. Eventually, though, the industry's good times will end, thanks to some combination of slowing demand growth from China, a change in monetary regimes and more aggressive resource nationalism (higher taxes and royalties, in plain English).

Investors should be under no illusions. Even after the recent price fall, iron is preternaturally hot. "Diversified" miners look anything but.