Goldman Sachs says an iron ore production cull won’t work

A new report by Goldman Sachs says there is no benefit in the major miners cutting iron ore production.

The report said any attempt to cull production would lead to inefficiencies in the sector, and would be too difficult to achieve given the size of iron ore’s major players.

“Efforts to support prices via voluntary production cuts would be counter-productive,” analyst Christian Lelong wrote in the report.

“First, production cuts would go against the prevailing trend of improving efficiency.”

“Second, the required coordination among dominant producers with different incentives would be more difficult to achieve among three companies; successful cartels in oil and potash have featured only one or two dominant producers.”

Iron ore has suffered a major drop in price this year, with many pointing the finger at the likes of BHP Billiton and Rio Tinto for producing record volumes of the commodity.

Recently, FMG’s chairman and founder Andrew Forrest called on the majors to reduce the amount of iron ore they were making in order to usher in a price rise.

Forrest has since been running a campaign which calls in to question the strategies of both mining houses.

He claims that by sending record tonnages into a market which is oversupplied, the miners are keeping the price low, and sending other operations with higher costs out of business.

Both BHP and Rio have rubbished these claims, stating that if they did not produce the ore, overseas rivals would step in to fill the void.

Commenting on pricing, Lelong said seaborne demand is likely to peak in 2016 and the iron ore market is becoming a “zero-sum game”.

“We expect the war of attrition will continue while prices gradually decline toward our $40 a ton forecast by 2017”, he wrote.

After falling to record lows of $US46.70 per tonne, but has since enjoyed a resurgence.

Benchmark iron ore for immediate delivery to the port of Tianjin in China was last trading at $US62.60, however most analysts do not expect the rise to last long.

Citi says the rally in iron ore prices has peaked and forecast sub $US40 prices of the second half of 2015.

Ratings agency Fitch also cuts its iron ore price predictions to $US50 per tonne this week.

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