Goldman: ‘Iron ore prices will go down but copper prices will rise’

Goldman Sachs predicts iron ore prices will fall this year as the physical market is about to fall into overcapacity, growing concerns that China will deepen steel production cuts and the world’s second-largest economy is in serious decline.

iron ore price Reference futures on the Singapore Exchange fell 11.8% from a cyclical high of $114.95 a tonne hit last month to $101.40 a tonne to end Wednesday’s session (August 9). ), in the session sometimes the price is only 99.5 USD.

Iron ore prices on Dalian (China) also fell from a cyclical high of $117.89 per tonne reached at the end of July to 723 yuan ($100.32)/ton at the end of August 9 session, after falling to only $ 99.26/ton in August 8 session.

And Goldman, the bank and broker, forecasts prices to average $90 a tonne in the second half of the year, marking a further 12% drop from current prices. That implies a drop of more than 20% from the most recent high – the last week of July, which meets the technical definition of a bear market.

The series of weak data coming from the Chinese economy and the failure of the Chinese Government to announce large economic stimulus packages as expected also put pressure on the iron ore market, in the context ofAnalysts are now very concerned that China will continue to cut output at steel mills.
‎Trade data on Tuesday showed China’s July exports fell 14.5% more than expected and imports fell more than twice as fast as expected. Meanwhile, July’s consumer price index (CPI) fell 0.3% year-on-year, the first drop since February 2021, making China the first G20 country to fall into the deflation since Japan last posted negative CPI growth two years ago.

Commodity prices rose in July after the Chinese government, at a Politburo meeting, pledged support for the struggling real estate sector. But that optimism has faded as the country has not yet announced strong stimulus measures and the market is increasingly concerned about China cutting steel production.

Goldman noted that China’s top economic planner, the National Development and Reform Commission, has been in touch with provincial governments to enforce steel production cuts. But the only province where such measures have been communicated to manufacturers is Yunnan, where the full-year production target is unchanged or lower.

Goldman estimates that if those cuts are replicated at the national level, that would mean crude steel production in the second half of the year would be down by about 50 million tonnes compared to the first half, and thus output of iron will decrease by 65 million tons. ore demand.

“For now, that remains a risk, although if such a cut takes place, it would create a clear demand shock,” said Goldman Sachs commodity strategist Nicholas Snowdon. for the iron ore market”.

China’s policy of limiting output in 2023 to last year’s levels “will make steel mills more cautious in purchasing raw materials,” analysts at Huatai Futures said.

Consulting firm Mysteel said steel demand in China will remain weak in August. Indeed, inventories of five key steel grades at China’s 247 steel mills continued to increase, not only due to reduced demand due to adverse weather conditions but also due to continued weakness in spot prices.

Even if China does not cut steel production, Goldman continues to predict that the physical iron ore market will be surplus to 68 million tons in the second half of the year, on the basis of export profit margin projections. China’s steel decline will coincide with a period of traditional steel production decline. That, coupled with stronger iron ore supplies, will leave the market in a glut, Mr. Snowdon warned.

Movement of iron ore prices on the Singapore floor and storage at Chinese ports.

The price of copper will increase

The only industrial metal for which Goldman continues to raise its price forecast is copper due to deteriorating supply.

Copper prices hit a nearly one-month low on Wednesday after weak Chinese auto sales and trade data raised concerns about demand from the world’s biggest consumer of the metal . Accordingly, copper futures for delivery in 3 months on the London floor price $8,335/, the lowest since July 11. The current price level has recovered from the level below $8,000/ton in May – the lowest in nearly 6 months, but still much lower than the high reached in January, at $9,550.50.

After the majority of co-producers reported second-quarter results, Goldman forecasts that global copper supply this year is on track to grow by just 2% year-over-year. Meanwhile, supply volume disruptions are outpacing the bank’s estimates.

Goldman also warned that refined copper inventories in China are reaching critical levels.

Mr. Snowdon “Given the current mining supply is growing at a much slower rate than refined production, the inventory of concentrates in the first half of this year equates to nearly all of the concentrate surplus in 2022,” said. , the risk is tilted towards a more limited supply of refined copper in the near term.”