Mining’s rally soon to end, investment groups say

Mining’s strong start to 2016 will soon reverse, with a number of investment houses predicting another decline ahead for the industry.

Goldman Sachs has forecast the current rally that has lifted gold to longest buying spree since 2010 and its highest point since 2011, and pushed iron ore up close to 70 per cent in value in the space of a few months will soon come to an end.

In a series of reports released yesterday, the bank stated current growth rates will ‘bottom out’, and iron ore and gold’s movements are “not sustainable”.

It stated the two year decline affecting mining has yet to end, and prices were likely to stay at the lower end as the market readjusted due to ongoing commodity oversupply coupled with softening Chinese demand.

This was echoed by Citigroup, which believes optimism over China’s economic movements will be short lived.

Citigroup remains bearish on metal’s future and Chinese demand, while Axiom Capital Management dismissed the current rally as a ‘blip’, according to Bloomberg.

Goldman Sachs forecast a bearish future for gold, and that iron ore’s resurgence will be only temporary.

“Higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices,” the analysts wrote in the report.

“But this lesson will likely only be learned through false starts.”

Jeffrey Currie, Goldman Sachs’ head of commodities research, stated, “Demand hasn’t really changed, [so] it takes lower prices to push and keep supply below demand to create a deficit.”

In terms of iron ore, even major miners remain cautious.

Growth is underpinned by consumption and services and is inherently less steel intensive,” BHP’s Western Australian iron ore asset president, Edgar Basto, stated yesterday at the Global Iron Ore & Steel Forecast Conference in Perth.

“Overall steel and pig iron production are expected to be subdued in 2016.”

In terms of gold a sharp drop is predicted.

Bernard Dahdah, from French investment bank Natixis, the winner of last year’s London Bullion Market Association’s gold price forecast competition, is predicting the metal to average around US$970 per ounce this year, with a low of US$900.

Dahdah predicted that “the biggest influence on the price of gold this year will be the expected path of interest rate hikes”.

“Natixis expects further rate hikes by the Fed this year, which should increase the opportunity cost of holding the metal,” he said in the London Metals Bulletin Market Association’s latest precious metals forecast.

“Outflows from physically backed ETFs are expected to continue as higher-yielding investments and a stronger dollar becomes more attractive to investors.

“The upside risk comes from possible delays in rate hike cycle due to a weak US performance or more severe economic issues in China.”

BNP Paribas’ Martin Squires also predicted a weak gold price, with an even more bearish US$960 per ounce average forecast, and a US$900 low for the metal.

“BNP Paribas believes that gold’s downward trend will remain in place throughout 2016, pressured by the slower global growth, strengthening US dollar and the associated expectation of three further US rate hikes this year,” Squires said.

“We are forecasting gold to average US$960 per ounce in 2016,” he said.

“Overall we find that the likelihood of a sustained improvement in Chinese demand during 2016-17 is low, and we remain strongly of the view that the structural bear market drives that have contributed to metals declining 20 per cent over the past year and 50 per cent over the past five years remain intact,” Goldman stated.



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