A worker pouring molten iron into a mold at a mill manufacturing marine engine components in Huaian, Jiangsu province, China.
The iron ore market is looking at a shortfall for the rest of the year due to low inventories and falling production, said Goldman Sachs.
“Rather than facing a surplus for this year, the iron ore market is now set for a clear deficit,” Goldman said in a recent report.
The analysts noted that the magnitude of Beijing’s recent fiscal spending could be a positive sign of domestic growth sentiment, which is often associated with a healthier construction industry and in turn, a higher demand for iron ore. The metal is primarily used to make steel, an important material in construction and engineering projects.
In late October, China’s central government said it will issue 1 trillion yuan ($139 billion) worth of additional government bonds to support efforts on rebuilding disaster-struck areas and increase the country’s disaster relief capabilities.
That being said, Goldman remains cautious in ascribing too much optimism in the uptick of steel demand coming out of China’s embattled property sector. China’s property crisis has been one of the biggest spanner in the works in achieving a sustainable economic recovery.
Compromised supplies, low inventories
Other drivers for the deficit include less supply from leading iron ore producers Australia and Brazil.
Global iron ore supplies in 2023 have been trimmed from 1.557 billion tonnes to 1.536 billion tonnes, Goldman estimates.
“This downward revision reflects underperformance in both Australian and Brazilian supply over Q3,” said the report.
“For Brazil, our equity analysts have attributed that underperformance to a failure in Vale’s S11D conveyor belt and lower production in the Southern System,” it added.
Steel coils are carried on an automatic production line at a workshop of the Xinyu Iron & Steel Group Co., Ltd. on September 8, 2023 in Xinyu, Jiangxi Province of China.
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Vale owns the world’s largest iron ore mine, the Serra Norte Mining Complex. Just a few weeks ago, the Brazilian mining giant reported an almost 4% year-on-year drop in its third-quarter iron ore output due to that conveyor belt system failure.
Additionally, Goldman observed that low iron ore inventory in China, the world’s third largest producer, is also set to contribute to the shortfall.
“With onshore mill restocking risk ahead of Chinese New Year and low supply chain inventories to buffer against supply disruption risk, the risk is skewed to the upside near term.”
The expected shortfall is a reversal from Goldman’s previous forecast for a surplus, with the investment bank’s analysts raising their iron ore price forecast by as much as over 20%.
Goldman now expects the full-year average for the benchmark 62%-grade iron ore to surge from $101 per tonne to $117 in 2023. For 2024, analysts are expecting a 22% jump from their previous forecast of $90 per tonne to $110.