Goldman Sachs Revises Iron Ore Price Forecast Amid Global Oversupply Concerns

Goldman Sachs (GS) has revised its iron ore price forecast for the December quarter, lowering it by 15% to $US85 per tonne from the previous projection of $US100 per tonne. This downward revision reflects the growing imbalance between supply and demand in the global iron ore market. The adjustment follows sustained oversupply, even as China, a key consumer of iron ore, shows signs of stabilizing its demand.

Global Iron Ore Oversupply Pressures Prices

According to a note from Aurelia Waltham at Goldman Sachs, the iron ore market is increasingly flooded with supply, pushing the commodity into surplus territory. "Despite the iron ore price falling by about 20% since July, global supply has remained robust, with total daily iron shipments currently running 2% higher than this time last year, and a similar picture for arrivals into China," Waltham wrote.

This persistent increase in supply has occurred despite lower export volumes from India, a significant player in the market. However, Goldman Sachs does not expect demand to recover in a way that would absorb the excess supply. Without a substantial recovery in demand, Waltham believes that producers further down the cost curve may be forced to cut output to help balance the market. "For this to happen, we believe a further decline in the iron ore price is needed," she added.

China’s Stabilizing Demand and Upcoming Golden Week

One area of interest for market participants is China’s demand for iron ore. China’s vast construction and manufacturing sectors are key drivers of global iron ore consumption, and any shifts in these industries have a profound impact on prices. While Chinese consumption appears to have stabilized, the oversupply situation continues to dominate the market, keeping downward pressure on prices.

Despite Goldman Sachs' overall pessimistic outlook for the December quarter, Waltham acknowledged the potential for a near-term rebound in iron ore prices. China's upcoming Golden Week holiday, which begins on October 1, could lead to a temporary boost in demand as mills restock their raw materials. This restocking activity may create a short-term pull on port stocks, leading to price stabilization over the next two weeks.

Waltham also highlighted the possibility of a "short covering rally" due to substantial short positioning in both the iron ore and Chinese steel markets. Such a rally could lead to a temporary rise in prices as traders close their short positions.

ANZ Research Shares Cautious Outlook on Iron Ore

ANZ Research has also weighed in on the outlook for iron ore, echoing some of Goldman Sachs' concerns about oversupply and the challenges facing the Chinese steel industry. In a recent note, ANZ pointed to the expected increase in supply from key exporters, as they resolve recent supply-side issues and ramp up shipments. This surge in supply, coupled with continued strong Chinese iron ore imports, has led to a buildup of stockpiles, which ANZ sees as contributing to downward pressure on prices.

However, while ANZ acknowledged the risks of further price declines, the research firm was not overly pessimistic. "We don’t expect prices to collapse," the note stated. One key factor offsetting weaker demand from China’s property sector is stronger demand from other sectors of the Chinese economy. ANZ highlighted several areas where demand could remain resilient or even grow.

Strength in China's Broader Economy

Investment in social housing, a priority for the Chinese government, is expected to rise, which should support demand for steel and, by extension, iron ore. Additionally, infrastructure investment remains robust, supported by government initiatives to expand the country’s renewable energy sector. China’s focus on renewable energy infrastructure has become a central component of its economic strategy, and this sector is driving demand for construction materials, including steel.

The automotive industry is another bright spot in China’s economy. With government policies aimed at boosting electric vehicle (EV) production and sales, the automotive sector is expected to increase its demand for steel. This growth is being further supported by broader manufacturing, machinery, and shipping industries, all of which are showing signs of expansion. These factors, combined, should help to lift China’s steel consumption into 2024, according to ANZ.

Long-Term Outlook: A Balanced Market?

Looking beyond the immediate concerns of oversupply, ANZ believes the iron ore market could achieve greater balance in the longer term. While current supply levels remain high, ANZ noted that growth in supply is expected to slow in the coming years. This deceleration, coupled with continued strength in sectors like infrastructure, EVs, and renewable energy, could help prevent a steep collapse in iron ore prices.

The long-term growth prospects in these sectors may offer a buffer against volatility in the iron ore market, allowing for a more stable pricing environment as demand gradually adjusts to meet the supply levels. For now, though, the iron ore market remains subject to fluctuations driven by both macroeconomic factors and supply-demand dynamics.

Bottom Line

Goldman Sachs’ decision to cut its iron ore price forecast for the December quarter reflects growing concerns over oversupply, even as demand from China shows signs of stabilizing. The bank expects the market to remain under pressure unless producers cut output, which may only occur if prices decline further. However, in the near term, events such as China’s Golden Week holiday could provide temporary relief, offering a window for price stabilization.

Meanwhile, ANZ Research presents a more balanced outlook, recognizing the challenges posed by oversupply but also noting areas of strength within the Chinese economy that could support demand for iron ore in the coming year. Investment in social housing, infrastructure, and the EV sector are expected to play key roles in offsetting weaker demand from the property sector.

Both Goldman Sachs and ANZ agree that the global iron ore market is at a critical juncture, with the interplay between supply and demand shaping its trajectory as we approach the end of 2024. Whether prices can stabilize in the near term or remain under pressure will depend largely on China’s consumption patterns and the ability of producers to adapt to the evolving market conditions.