Goldman Sachs downgrades iron ore price forecasts

Goldman Sachs cut its forecasts for iron prices as it pointed to slowing demand and growing supply.

The bank downgraded its forecast for 2016 by 13% to $38 a tonne, and for 2017 and 2018 by 14% to $35 a tonne, to reflect the need to displace around 250 million tonnes of seaborne mining capacity over the next three years, equivalent to 18% of current supply.

“The short-term outlook remains exposed to the deteriorating health of the Chinese steel industry. Record export volumes have failed to fully offset a material decline in domestic demand, and operating margins have been under pressure for most of the year,” the bank said.

“The accumulated cash losses of a typical mill have already surpassed those in similar periods during 2013-14, and balance sheets continue to deteriorate with each passing day. Reports of job cuts and permanent closures are mounting, and our macro colleagues expect spot demand for seaborne ore to be depressed in the period to Chinese New Year; buyers operating on a hand-to-mouth basis can turn instead to port inventory.”

Goldman said iron ore consumption in the Chinese steel sector has significant downside risk.

It said the cumulative installed steel base in China is fast approaching OECD levels.

GS said that even if steel stock per capita were to stabilise at 10 tonnes by 2040, versus 5.6 tonnes today, steel consumption would find an equilibrium level slightly below 600 million tonnes per year, which is a 17% drop on 2015.

Iron ore demand is likely to fall by 50% over that period on the back of lower steel consumption and higher scrap usage, and the iron ore sector may have to shutter in capacity for an extended period before alternative steel markets in other regions take over from China and usher in the next bull market.