Goldman Says Iron Ore's Going `Back to $35' as Surplus Returns

Jasmine Ng

Goldman Sachs Group Inc. has one piece of advice after this year’s dramatic iron ore rally: go short.

“We think this market will go back to $35 during the fourth quarter,” analyst Christian Lelong said in an interview. That’s 50 percent below Thursday’s close of $70.46 a dry metric ton, the highest level since January 2015. “Our expectation is the oversupply in the iron ore market will return.”

Iron ore has surged in 2016 in sharp contrast to the previous three years, when a slowing Chinese economy hurt prices and too much supply chased too little demand. This year, policy makers in China have talked up growth and added stimulus, presiding over a revival in the property market that’s boosted the outlook for steel consumption. Still, burgeoning supply and stalling demand growth may once again drag prices down, according to Goldman.

“Going into the second half of the year, what are you going to need to absorb all that iron ore supply?” New York-based Lelong said by phone from London on Thursday. “It’s going to be very hard to have strong enough demand growth in the Chinese steel sector to keep things in balance.”

Steel Rally

Ore with 62 percent content delivered to Qingdao jumped 8.8 percent on Thursday, according to Metal Bulletin Ltd. data, as steel prices in China extended gains. Since bottoming at $38.30 in December, iron ore has rebounded 84 percent, surprising many analysts that had forecast further losses in 2016 as low-cost supply increases.

China’s economy gathered pace in March as a surge in new credit helped the property sector to rebound, with housing values in first-tier cities soaring. Steel mills in China, which make about half the world’s supply, boosted production to a record last month as higher product prices improved their margins, reversing a squeeze from last year.

“When we look at the profitability of steel mills, we’ve gone from multiyear lows late last year to a multiyear high in the last couple of weeks. It’s a huge swing,” Lelong said. “The margins are so attractive that you can afford to pay higher and higher prices for your raw materials. That means iron ore is now well above the” cost curve, he said.

‘Come Back Down’

Even miners have said they expect prices to retreat, citing prospects for more supply. BHP Billiton Ltd.’s Mike Henry, president operations, minerals Australia, told Bloomberg Television on Thursday more low-cost production is coming and that “we’ll see prices come back down again”. Rio Tinto Group’s Sam Walsh said last week prices “may well soften in the second half.”

Goldman’s view tallies with the outlook from Citigroup Inc., which says the market faces increasingly severe oversupply. Gains in production, including from miners that restarted output after this year’s rally, coupled with likely losses in steel prices, will combine to hurt iron ore, Citigroup said this month.

More production is on the way from the world’s two largest shippers. Cargoes from Australia may rise 10 percent to 846 million tons this year as billionaire Gina Rinehart’s Roy Hill venture ramps up, the country’s Department of Industry, Innovation & Science has estimated. Brazilian exports will gain about 7 percent to 393 million tons, it said.

Goldman Says Iron Ore's Going `Back to $35' as Surplus Returns

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