Seaborne iron ore prices will remain on a downtrend over the next two years, declining to the $40/dmt CFR China level in 2017, investment bank Goldman Sachs said in a note Thursday.
"We expect prices to decline... to $44/dmt [CFR China] next year and $40/dmt in 2017," Goldman analysts said.
The Platts 62% Fe Iron Ore Index, or IODEX, was assessed at $45.30/dmt CFR North China Thursday, relatively close to Goldman's 2016 forecast.
Goldman said the iron ore market is still "oversupplied" and "prices must overshoot relative to marginal production costs in order to trigger mine closures on a sufficient scale."
It expects the "divergence between production capacity and demand to continue" as global ore supply is not showing signs of any cutbacks.
The collapse of an iron ore tailings dam at Samarco's operations at Minas Gerais in Brazil a fortnight ago, with an estimated loss of approximately 2% of seaborne supply, has not had a significant impact on the supply glut.
With two major iron ore developments -- Roy Hill in Western Australia and Vale's S11D development in Brazil -- due to commence operations in the next 12 months and China's steel consumption remaining lackluster, Goldman sees little upside in the fundamentals.
Buying appetite for iron ore, a core steelmaking raw material, is significantly impacted by steel demand at the downstream, as well as steel production levels in China, which is the world's largest consumer of ore material.
"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," the bank said.
Battling with poor steel sales and softening prices, many steel mills across China are considering more significant output cuts in order to deal with heavy losses and increasingly pessimistic margins.
