Iron ore up but views diverge on way ahead

In a report this week, Goldman Sachs says that it expects the iron ore price rally, which has seen prices lift around 38% from their April lows of US$47/t, to inevitably fizzle.

As reported in the AFR, Goldman’s commodity analyst Christian Lelong said the price rise, which has provided hope for junior producers, would be short lived and self-defeating, with prices set to plumb sub US$50/t within three years.

“The market outlook remains unchanged. In our view, prices must fall below the cash cost of marginal producers in order to force the mine closures required to balance the market,” wrote Mr Lelong.

The recent price surge has been prompted by low port stocks in China, and adverse weather conditions impacting supply.

Goldman Sachs says it will take some time to top up Chinese port inventories, leading to a short term continuation of higher prices.

However, in the medium term Lelong sees inventory growth and export growth normalising, while “structural drivers will come back to the fore” with more mine closures “inevitable”.

In contrast to Goldman Sachs, Paradigm Securities and its perennially bullish boss Barry Dawes sees brighter days ahead.

In a report this week, he said that “China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.

“The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt. So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.”