Iron ore future appears grim

As iron ore prices reach near-decade lows, banks are predicting a continued downwards trend for the metal.

Goldman Sachs has predicted continuing weakness for iron ore over the next two years, in line with its current decline.

"We expect prices to decline… to $44/dmt [CFR China] next year and $40/dmt in 2017," Goldman analysts said in a note last week.

"We have been forecasting weak commodity returns since last fall, although the extent of this weakness has far exceeded our initial expectations.”

It pointed to ongoing oversupply, and expects “divergence between production capacity and demand to continue".

Last week iron ore fell to the second lowest point on record since SteelIndex began tracking prices in November 2008, and close to the lowest point since fellow iron ore price tracking Metal Bulletin began keeping score, when the price hit its trough at US$44.59 in May 2009.

It then declined further, falling to US$45 per tonne at the Chinese port of Tianjin, and even lower at Qingdao port, to US$42 per tonne.

Much of this is due to the aforementioned oversupply affecting the market, as the major miners continue to post new production records despite collapsing prices, in part driven by the Brazilian iron ore mine tailings disaster, and cuts in Chinese steel mill outputs.

Speaking on Chinese demand, Goldman Sachs predicted further shrinking.

"In the medium to long term, we expect Chinese steel production to contract significantly… [T]he downward momentum in Chinese steel prices continues and profit margins among steel mills appear unsustainable.

“We don't believe that current prices present an appealing entry point to position for higher commodity returns, despite the perceived asymmetric risk-reward at low spot prices and post such weak returns,”