Iron ore market facing oversupply, prices to fall: Goldman Sachs
After years of tightness, iron ore supply growth is set to exceed demand growth in 2014, with prices forecast to decline from 2013 levels this year and fall further in 2015, Goldman Sachs said.
“We believe the steel intensity of the Chinese economy will be on a downward trend from 2014 onwards, following a decade where steel production growth outpaced GDP growth,” the investment bank’s research department said in its latest mining commodities outlook report.
On the supply side, Australian production capacity continues to expand strongly.
“Australian supply growth, in addition to further expansions in other supply regions, will drive the seaborne market into a period of structural surplus in 2014 and the scale of the surplus will grow into 2015,” Goldman said.
The bank is forecasting an average price for 62% Fe iron ore fines, CFR China, of $108/dry metric ton this year, down from $135/dmt in 2013, and falling further to $80/mt in 2015. For 2016 and 2017, the forecast price is relatively stable at $82/dmt and $85/dmt, respectively.
Platts assessed its 62% Fe Iron Ore Index at $123/dmt CFR North China Tuesday, down $3.25/dmt from the previous day due to waning demand caused by lack of confidence as well as bearish expectations about the Chinese steel sector.
Goldman estimates that around 20% of Chinese iron ore production may close over the period 2014-15, but that total domestic production will only decline by around 9% in raw ore terms once new supply is taken into account.
“The displacement of marginal Chinese production over the period 2014-15 will not be sufficient to balance the market, and some seaborne capacity will also be forced to close over the next two years,” Goldman said.
Recent experience in other commodities such as metallurgical coal “suggests that prices often overshoot on the downside in an oversupplied market,” it said, adding: “Prices must remain below the marginal cost of production for long enough to induce mine closures.”
Goldman put the level of cost support for seaborne iron ore at $85/dmt CFR China, based on mines that have sufficient scale to influence the market price and that have relatively high costs because of low Fe grades (for a seaborne producer) and/or challenging geological conditions.
“In an oversupplied market where some seaborne capacity is forced to close, we believe spot prices may undershoot for a period of time,” the bank said, suggesting that large producers at the bottom of the cost curve are unlikely to manage output in order to support prices.
“There are limited examples of successful supply discipline in the commodities sector (e.g. potash, mineral sands) and we don’t believe the level of concentration in seaborne iron ore is high enough for supply discipline to hold,” Goldman said.
Moreover, it added, “cutting production below capacity would go against the current strategy to improve operational efficiency and increase productivity.”
Early signs of oversupply are expected from the second quarter of 2014 onwards, the bank said, noting that iron ore supply in major producing regions (Australia, Brazil, China) is impacted by weather-related disruptions in the first quarter of the calendar year, while steel demand in China is also at a seasonal low over that period.
“In our view, the market will remain balanced in the short term, but we expect seaborne supply to start overtaking demand during Q2 2014,” Goldman said.