Will iron ore fall below US$40 per tonne?

Market bears are predicting iron ore will continue its decline, falling below US$40 before the end of the year.

Independent analyst Andy Xie believes the commodity will slip below US$40 per tonne, and will trade just above US$30 per tonne next year, according to Bloomberg.

The former Asia-Pacific head economist at Morgan Stanley previously pointed to the steel industry reaching a crisis point, adding they needed to cut production to drive demand.

Xie had also forecast the US$40 lows reached earlier this week, when the price was still in the US$60 sphere.

Goldman Sachs has also 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.

 However others are not as bearish as Xie and Goldman Sachs.

“We don’t disagree with Andy Xie’s short-term forecast that iron ore prices may dip below $40 by year-end or by the Chinese New Year as demand falters while supply, at least from overseas miners, still rises,” Chen Yan, deputy general manager at Shanghai Steelhome Information Technology Co. told Bloomberg.

 “But we think it’s quite unlikely that prices will remain below $40 for a prolonged period.” 

 

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