Investment bank Goldman Sachs late Wednesday lowered its iron ore price forecast for 2017 by $5/dmt to $35/dmt CFR China after a faster-than-expected softening in seaborne prices.
"Iron ore prices have reached our $40/dmt forecast one year ahead of schedule... we downgrade our 2016, 2017 [and] 2018 forecasts to $38, $35 and $35 [respectively] to reflect the need to displace circa 250 million mt of seaborne mining capacity over the next three years, equivalent to 18% of current supply," Goldman Sachs analysts Christian Lelong and Amber Cai said in a note.
The bank on November 17 had forecast spot iron ore prices to hit $40/dmt by 2017, but has had to lower its prediction after prices breached that level in early December.
This was "partly due to a recent downward shift at the higher end of the cost curve that was well beyond the typical rate of cost deflation," the analysts said in Wednesday's note.
Seaborne iron ore prices hit an historic low Tuesday when the Platts 62% Fe Iron Ore Index was assessed at $38.50/dmt CFR North China. Prices edged up up 65 cents/dmt to $39.15/dmt CFR North China Wednesday but remained 45% lower than at the start of the year.
The analysts expected the pace of iron ore mine closures to accelerate in 2016 as producers with negative cash flow struggled to secure financing.
The loss of 5 million mt/year capacity at BC Iron's halted Nullagine project in Australia and a planned 10 million mt/year cut at Kumba in South Africa was "not enough to offset bearish sentiment among steel mills and traders in China, where tight liquidity and depressed profit margins are driving buyers away from the seaborne market," the analysts said.
On the demand side, Goldman said ore consumption by the Chinese steel sector continued to possess "significant downside risks."
The analysts forecast steel consumption to settle at an equilibrium level of 600 million mt/year by 2040, down a sharp 17% from 2015, and resulting in a 50% fall in demand for iron ore over the same period.
They estimated this decline as equivalent to a 30% slide in global ore consumption.
"The iron ore sector may have to hibernate for an extended period before alternative steel markets in other regions take over from China and usher in the next bull market," the analysts said.
