Iron ore declined sooner than expected this year as supplies exceeded demand and prices are unlikely to recover, according to Goldman Sachs Group Inc., which said 2014 will mark the end of a so-called iron age.
This year “is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean,” analysts Christian Lelong and Amber Cai wrote in a report today titled: “The end of the Iron Age.” The 2016 forecast for seaborne ore was cut to $79 a metric ton from $82 and the 2017 outlook was reduced to $78 from $85, according to the New-York based bank, which stuck with a forecast for $80 next year.
The raw material tumbled into a bear market this year as the biggest producers including Rio Tinto (RIO) Group expanded low-cost output, betting higher volumes would more than offset falling prices while less competitive mines were forced to close. The decline in prices came sooner than expected, according to Goldman, which said in November that iron ore would probably drop at least 15 percent this year. The commodity is seen in a structural downtrend, JPMorgan Chase & Co. said today.
“The price decline has been dramatic, but a weak demand outlook in China and the structural nature of the surplus make a recovery unlikely,” Lelong and Cai wrote. “Lower prices for iron ore and steel are unlikely to boost demand in a material way. Instead, the day when steel production in China will peak gets ever closer.”
