Goldman Sachs predicts iron ore prices will fall to $85

Goldman analysts short cover rally forecasted early last week in China’s iron ore prices completely reversed. After all, analysts at the bank said the rally should be sold. Analysts have now revised their Q4 2024 iron ore price forecast to $85/t, down from $100, on strong global supply and weak demand from the world’s second largest economy. They add that the build-up of inventories at Chinese ports suggests prices will be pushed lower unless lower-cost producers cut production.

Last week, ahead of Goldman’s iron ore note telling clients to “desk expect rally short cover rally”, Singapore prices fell to $90/t, the lowest level since 2022, on concerns that global supply exceeds demand. Prices briefly jumped to the $95/t level, where Goldman told clients: “Be ready to sell at the $95-100 level,” noting that “iron ore’s fundamental outlook remains bleak.”

A week later on Monday, Goldman analysts Aurelia Waltham, Daan Struyven and Samantha Dart pointed out that iron ore prices recently hit a near two-year low of $90/t, driven by strong global supply despite stabilizing Chinese demand .

They said prices of the industrial metal have fallen about 20 percent since July, but shipments remain 2 percent higher than last year, with similar arrivals in China. They added that India has reduced exports, but without a significant recovery in demand, further output cuts from lower-cost producers are needed to rebalance the market and support prices.

Due to the supply imbalance, analysts revised their Q4 2024 price forecast to $85/t, noting that replenishment ahead of China’s Golden Week could provide near-term support. However, they said prices are expected to fall further in October due to rising inventories.

The most important chart in the analyst’s chart package is that increased iron ore inventories in China, due to a weakened economy, led to lower prices. In other words, the stock must fall to experience a significant price recovery.

Here’s more color on the depressed iron ore market from analysts:

Following China’s macro slowdown data in July, activity was well below market expectations and our Chinese economists cut their 2024 GDP growth forecast to 4.7% from 4.9% previously. Annual industrial output growth slowed, fixed asset investment growth improved less than expected, although export growth was stronger. After two months of decline, the volume of steel exports rose 21% month-on-month to 9.5 million tonnes in August, bringing last year’s annual increase to +19%. This likely helped limit the decline in flat steel output last month (-4.6% monthly in August) and iron ore consumption as Mysteel data showed sluggish domestic demand.

Looking ahead, we believe that the potential for lower exports is a key risk to China’s steel production over the coming year and could lead to further declines in Chinese iron ore demand, given that we view support as unlikely increased by domestic demand. .

After a substantial decline in the price of iron ore over the past three months, China’s upcoming Golden Week holiday (starting on October 1) could bring some price stabilization over the next two weeks as mills restock raw materials, creating a attraction of demand on port stocks. Indeed, last week’s data showed a 2.6% WoW increase in factories’ factory stocks, marking the biggest increase since the pre-Lunar New Year restock. There is also a near-term risk of a short increase in coverage due to substantial short positioning in both the iron ore and Chinese steel markets.

However, although the build-up in port stocks stopped last week, they remain about 30 million tonnes above the September 2016-2023 average. Meanwhile, China’s total iron ore stocks (including tons held at mills) continue to rise, counter-seasonally, and despite lower iron ore shipments from India in response to lower prices. Furthermore, even with India’s decline, high-frequency vessel tracking data shows that global iron ore shipments in the first two weeks of September were 3% higher than in the same period in 2023, and Vale raised its guidance for this year to 323-330Mt.

As a result, we believe another lower leg of prices towards the 95th percentile (~$80/ton on a grade-adjusted basis) would be needed to (1) completely remove new Indian tonnage from the maritime market and (2) supply under pressure further. down the cost curve to rebalance fundamentals. Therefore, we are downwardly revising our Q2024 price forecast to $85/t (previously $100/t).

In a separate note, a team of Goldman analysts led by Aurelia Waltham and Daan Struyven said the “fundamental outlook for iron ore remains bleak” as prices traded at a two-year low.

This was the most amazing chart in the analyst report: Just 1% of steel mills are profitable in the second economy in the world. As profitability collapses, hot metal production declines.

Earlier this month, Goldman’s Rich Privorotsky told clients: “Iron ore is down to 90, China will continue to struggle, and commodities as a whole, I think, reflect the downgrading of growth expectations in geography.”

China’s steel industry has been under pressure amid a severe downturn in the housing market and a weak economic recovery.

Last month, Baowu Steel Group Chairman Hu Wangming ADVISED that economic conditions in the world’s second largest economy felt like a “harsh winter.”

As the world’s largest steelmaker, Chairman Baowu Steel said the steel industry’s decline could be “longer, colder and harder to bear than expected”, potentially mirroring the severe recessions of 2008 and 2015.

Another team of Goldman analysts, led by Yuting Yang and Lisheng Wang, recently published high-frequency economic indicators, including consumption and mobility; production and investment; other macro activities, and markets and politics, that disclosure there was no imminent recovery in China.

Meanwhile, the JPM Global Manufacturing PMI fell (

In addition to cutting price targets for iron ore, Goldman Daan Struyven recently cut the forecast range for Brent oil by $5 to $70-$85 a barrel, citing weaker oil demand from China, high inventories and rising U.S. shale production.

None of this is new in the market, where the sentiment is downright apocalyptic. As mentioned a few weeks ago, bullish positioning in oil has just bottomed outw.

China’s rapid deceleration and signs of a slowdown in the US have further limited commodity price growth. It remains uncertain whether the US interest rate cuts that begin this week will boost economic growth. At the same time, more clarity on Chinese economic policies is expected to emerge after the US election in November.

By Zerohedge.com

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