Goldman Takes Ax to Iron Ore Outlook as Industry Hibernates

  • Iron ore seen at $38 a ton next year, $35 in 2017, bank says
  • Drop to $40 came about year earlier than Goldman expected

Goldman Sachs Group Inc. took the ax to its iron ore forecasts, predicting the price will remain under $40 a ton for the next three years as China’s slowdown forces the global industry into a long period of hibernation.

Iron ore will average $38 a metric ton next year and $35 in both 2017 and 2018, analysts Christian Lelong and Amber Cai wrote in a report received on Thursday. The new forecasts are 13 percent to 14 percent lower than the bank’s previous outlook.

Iron ore has been pummeled this year as surging output from the largest miners including Rio Tinto Group and BHP Billiton Ltd. in Australia and Brazil’s Vale SA combined with weaker demand in China to produce a glut. Goldman Sachs said it expected mine closures to accelerate next year as the health of China’s steel industry deteriorates. The bank raised the prospect that by 2040, China’s iron ore demand may contract by 50 percent as steel consumption drops and more scrap gets used with greater recycling.

“The iron ore sector may have to hibernate for an extended period before alternative steel markets in other regions take over from China and usher in the next bull market,” Lelong and Cai wrote, adding that prices had reached the bank’s $40 forecast one year ahead of schedule. At present, China makes about half of the world’s steel.

Slumping Prices

Ore with 62 percent content delivered to Qingdao rose 0.6 percent to $39.43 a dry ton on Thursday, according to Metal Bulletin Ltd. The commodity bottomed at $38.30 on Dec. 11, the lowest level in daily data dating back to May 2009.

Rio Tinto has no concerns over China’s growth trajectory, Chief Executive Officer Sam Walsh said this month, predicting that the nation’s steel intensity will continue to rise and that steel demand in the rest of the world will grow 65 percent in the next 15 years. China’s steel output will be a lot higher than 600 million tons a year, according to BHP’s Andrew Mackenzie.

While iron ore has slumped, prices remain above levels seen in recent decades. The commodity traded as low as $10.51 a ton in 1988, when annual contracts were negotiated between top miners and some mills, according to data from the International Monetary Fund. That system was superseded by a shift to spot rates as China’s demand ballooned, a situation that’s now gone into reverse.

Lower Output

China’s steel output fell 2.2 percent to 738.38 million tons in the first 11 months of this year, according to the statistics bureau. More cuts are needed, Li Xinchuang, deputy secretary-general of the China Iron & Steel Association, said in November. Chinese output will shrink to about 783 million tons next year from 806 million tons in 2015, the association has forecast.

Steel consumption in Asia’s top economy may find an equilibrium at slightly less than 600 million tons, about 17 percent lower than this year, Goldman said. A halving of the country’s iron ore demand by 2040 would equate to a drop of about 30 percent in global consumption, it said.

Miners’ shares have dropped this year are iron ore sagged. BHP, which is also facing fallout from a mine-dam burst in Brazil, ended at A$17.02 in Sydney on Thursday, 38 percent lower in 2015. Rio has lost 25 percent this year, while Fortescue Metals Group Ltd. fell 33 percent.

“The short-term outlook remains exposed to the deteriorating health of the Chinese steel industry,” Lelong and Cai wrote. “A maturing steel market in China is ushering in a long period of hibernation for the iron ore industry.”

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