Goldman Sachs on iron ore bull run, outlook


A freight train carrying iron ore travels towards Port Hedland, Australia on Tuesday, March 19, 2019.

Ian Waldie | Bloomberg | Getty Images

SINGAPORE – Iron ore has been in a bull market for more than two years that, according to Goldman Sachs, won’t end anytime soon.

“It would be wrong to say that the iron ore bull market is about to end,” said Nicholas Snowdon, head of research on base metals and bulk goods at the investment bank.

It is unlikely to return to a “comfortable position” until 2023, Snowdon said on Tuesday at the Singapore Iron Ore Forum, part of the Singapore International Ferrous Week.

The bull run started with a supply shock from the Brumadinho Dam disaster in 2019, but is now a “material bull market,” Snowdon said, referring to the fatal collapse of a dam in Brazil involving mining giant Vale. After the disaster, iron ore prices rose sharply.

Prices are now being supported by very strong demand and suppliers have been disciplined not to increase production, he said, adding that inventories are also very low.

China’s benchmark iron ore futures have hit record highs this year. The most active iron ore futures contract on the Dalian Commodity Exchange with delivery in September was 1,241 yuan ($ 192) on Friday at 3:00 p.m. Beijing time, up 1.88%.

“It won’t really be until 2023, 2024 for the iron ore market to regain a … more comfortable position,” predicted Snowdon.

“Incredibly strong” demand growth

Demand for iron ore – a raw material used to make steel – has been strong and that trend looks set to continue into next year, Snowdon said.

He pointed out that the growth in Chinese steel demand for the past three years has been a pleasant surprise.

“While China shows some signs of slowing the rate of growth in steel demand in the second half of the year and through 2022, the dynamism of steel demand in the rest of the world and (developed markets) is incredibly strong,” he said.

This “above-trend rate of demand growth” is likely to continue through 2022, in part because steel will be a key commodity in building green infrastructure, Snowdon said.

On the supply side, he said supply growth has not responded to high prices and manufacturers are disciplined in investing.

“If you look to the next two or three years, supply growth rates are actually going to slow … from where they are today,” he said. “There is no immediate risk of a major supply reaction in the iron ore market and that is very important to the … price outlook.”

At the moment it looks like a very tight market with very strong support from supply demand and still robust demand growth rates.

Nicholas Snowdon

Goldman Sachs

Rohan Kendall, director of iron ore research at Wood Mackenzie, repeated the same feeling

“Australian producers have almost reached the limit of their infrastructure availability, so they cannot expand at any rate,” he said during a separate panel discussion.

Meanwhile, production from Brazil’s Vale is likely to remain curtailed as the metals and mining company continues to handle issues related to the dam disaster two years ago.

Kendall said the company still faces challenges that will take several years to complete.

Goldman’s Snowdon said iron ore had “a robust foundation” and “gradual softening” ahead of it. Prices would only sag if demand growth rates slow, he added.

“Right now it looks like a very tight market with very strong support from supply demand and demand growth rates still robust,” he said.

Unsustainable prices

Iron ore prices are unlikely to stay above $ 200 a ton, said Kendall and Erik Hedborg, senior analyst at commodity intelligence company CRU.

“If we look ahead – about 12 months – I don’t think the iron ore price will collapse,” said Kendall.

“I think prices above $ 200 per ton are unsustainable, but we’ll likely see prices stay around $ 150 per ton,” he said. These values ​​are still “extraordinarily high” in historical comparison, he said.

CRU’s Hedborg agreed that prices will remain high.

“Of course not the $ 200 per tonne we’re seeing right now, but we will definitely see prices in excess of $ 100 per tonne for the rest of the year,” he said.

Snowdown did not set any price targets, although a bull market usually ends when prices drop 20% below their highs.

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