Goldman Boosts Iron Ore View as ‘Oversupply’ Two Years Away

Iron ore will see another year of “exceptional prices” before supplies start to outpace demand, Goldman Sachs Group Inc. said today as it increased its forecast for the seaborne commodity used in steel.

Prices will probably average $144 a dry ton in 2013, up from $140 estimated previously, the bank said in an e-mailed report. The ore may decline to $126 in 2014 before averaging $90 in 2015 and $80 in 2016, it said.

Iron ore surged 76 percent since dropping to a three-year low in September on optimism China, the biggest buyer, is recovering. JPMorgan Chase & Co. today increased its 2013 estimate to an average $130 from $110, while Deutsche Bank AG said Jan. 8 prices may climb to $170 in the first half before falling below $120. Rio Tinto Group, the second-biggest exporter, posted yesterday better-than-expected output for the fourth quarter and said it will press ahead with expansion.

The “market is headed for a long period of significant oversupply, but in our view this is still two years away,” said Goldman. “We expect iron ore producers will see one last year of exceptional prices and profit margins” as the “restocking phase continues, supply starts to tighten and market sentiment becomes more bullish,” the report said.

Ore with 62 percent iron content delivered to the Chinese port of Tianjin declined a fourth day, dropping 1.1 percent to $152.90 yesterday, according to data from The Steel Index Ltd. Prices climbed to $158.50 on Jan. 8, the most expensive since Oct. 13, 2011 after rallying 39 percent in the three months through December, the most since at least 2009.

Unwilling Buyers

The rally prompted Chinese steelmakers to use more domestic supplies, a survey by Mysteel.com showed. Higher prices will stop mills from rebuilding inventories, according to Hebei Iron & Steel Group and Maanshan Iron & Steel (323) Co. The country’s steelmakers are unwilling to buy imported ore at above $150, UBS AG analyst Hubert Tang said yesterday.

Prices will drop from an average $145 in the first quarter this year to $120 in the fourth quarter as new supply comes on stream, Fraser Jamieson, an analyst at JPMorgan, said in a report. The bounce in prices from September while China’s production was stable suggests restocking, “which we estimate will come to an end around Chinese new year in early February when activity typically slows,” he said.

Imports last month climbed to a record 70.94 million tons from 65.78 million tons in November, customs data show.

“Strong demand growth in China has induced the development of low-grade, high-cost operations that require relatively high prices in order to remain viable,” said Goldman. “As long as those mines remain in operation, we believe the seaborne price will be supported at a high level.”

The growth in the China’s steel output will accelerate to 4.9 percent in 2013, while inventory levels in the country’s ports of 73 million tons are at their lowest since January 2011, said Goldman.

To contact the reporter on this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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