Goldman Sachs Predicts a Decline in Iron Ore Rally
The recent fiscal and monetary measures announced by China may not be sufficient to eliminate the deflationary risks threatening the world's second-largest economy. The ongoing real estate crisis remains a significant concern, and iron ore markets are showing a downward trend after a brief surge in late September following Beijing's initial stimulus announcement.
Goldman Sachs Advises Clients to Fade Iron Ore Rallies
Around September 24, as the iron ore rally was gaining momentum, Thomas Evans from Goldman Sachs advised his clients to fade iron ore rallies. He explained that in the long term, the two major obstacles to the ferrous supply chain are the overcapacity of steel and the increasing supply of iron ore. He added that these issues cannot be resolved quickly. He suggested that the key indicator to watch is the extent and timing of iron ore production cuts from junior miners to rebalance the market. He further stated that the market cannot rebalance until steel capacities are shut down and junior iron ore miners reduce production.
Iron Ore Prices Take a Plunge
Between September 24 and October 7, iron ore prices rose by nearly 28%, from $89 a ton to $114. However, on October 8, prices fell from about $114 to $105 following news that China's National Development and Reform Commission did not deliver the expected level of stimulus.
Goldman Sachs Predicts Further Decline in Iron Ore Prices
With iron ore prices dropping below the $100 a ton level on Friday, Goldman Sachs analysts Aurelia Waltham, Daan Struyven, and Samantha Dart predict that prices will fall back to around $90. They believe this is necessary for a much-needed rebalance as port supplies remain high. They also highlighted the risk of steel prices reversing the gains made since the end of September if the stimulus disappoints, which could put additional pressure on steelmakers' margins and result in cuts to hot metal output.
In a separate note, Gerald Tan from Goldman Sachs described the price movements in iron ore as a "Too furious ferrous rally." He reiterated the view that iron ore prices need to fall below $90/t to rebalance the fundamentals.
Goldman Sachs Provides Insight into Oversupplied Conditions
The analysts provided clients with a chart pack that clearly illustrates the oversupplied conditions in terms of prices, fundamentals, supply, consumption, and finished steel. So far, Goldman Sachs has accurately predicted the volatile price action in iron ore futures, suggesting that a lower for longer approach is key for proper rebalancing.
Bottom Line
It's clear that the iron ore market is facing significant challenges, and the predictions from Goldman Sachs suggest that a rebalance is necessary for the market to stabilize. What are your thoughts on these predictions? Do you think the iron ore market will be able to recover? Share this article with your friends and let them know your thoughts. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
