Goldman's Now Bullish on Iron Ore This Year — But Not Next

Updated on
  • Three-month forecast raised 27% on outlook for Chinese demand
  • ‘We take a bearish view during 2018’ on supplies, bank says

Iron Ore Soars as Bull Case Gets Big Lift

Goldman Sachs Group Inc. boosted its iron ore forecasts after better-than-expected demand in China raised prices, but warned that it remains bearish on next year amid prospects for plentiful mine supplies and a worldwide glut.

The three-month forecast was raised to $70 a metric ton from $55, and the year-end target increased by $5 to $60, according to a report from analysts including Yubin Fu and Max Layton received Thursday. Next year, prices are still expected to drop, it said.

Iron ore has surged in recent weeks to top $70 a ton on sustained demand from China, the largest user. Steel mills in the country have benefited from rising product prices and strong profit margins after the government shuttered some capacity, and remaining producers are making record volumes. That’s helped to absorb increased mine supplies this year from Brazil and Australia, aiding miners including Rio Tinto Group, BHP Billiton Ltd. and Vale SA.

“The strength in iron ore prices is likely to continue in the short term as strong Chinese steel and iron ore demand from infrastructure and property new starts is complemented by solid growth in global activity ex-China,” the analysts said. Still, “while we hold a relatively bullish view on iron ore for the second half of 2017, we take a bearish view during 2018.”

Spot ore with 62 percent content in Qingdao was at $70.20 a dry ton on Thursday after gaining for five of the previous six weeks, according to Metal Bulletin Ltd. While it’s rebounded from a low near $50 a ton hit in mid-June, the raw material remains 11 percent lower this year.

Iron ore futures in Asia climbed on Thursday, with the SGX AsiaClear contract rising as much as 1.5 percent and that on Dalian Commodity Exchange adding 1.7 percent. In steel markets, reinforcement bar was steady on the Shanghai Futures Exchange, while hot-rolled coil rose for a third day.

‘Pressure to Build’

“We expect supply pressure to build into 2018, mainly driven by Vale, Rio Tinto and BHP,” Goldman said. “The market would need lower prices to clear a seaborne surplus of more than about 100 million tons during 2018, which we estimate at around $50 to $55 a ton based on the cost curve.”

Australian miner Fortescue Metals Group Ltd. is targeting exports of 170 million tons in fiscal 2018 as it cuts costs, according to a statement on Thursday. The producer reported a rise in June quarterly shipments that beat analysts’ estimates, and its performance follows record production from Vale.

Goldman’s higher near-term forecasts follow a bullish outlook from BNP Paribas SA, which recommends investors go long on iron ore as prices may hit about $80 by the end of 2017. Westpac Banking Corp. has also said the current rally may run for a while, but it’s warned of a drop back to about $40 in 2018.

“We expect plentiful iron ore production to come into the market in 2018,” Goldman said. “In most cases, this is low-cost, which would put downside pressure on our price forecast. This is very different from 2017, where we expect the seaborne market to be roughly balanced.”

(Updates spot price in fifth paragraph.)
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