Goldman Sees Growing Iron-Ore Surplus Through 2017

Michael Teague |

With the world’s largest mining companies posting record iron-ore production numbers and the recent slow-down of Chinese economic growth, Goldman Sachs (GS) on Tuesday said that the global market for the metal is heading for a supply glut that could last through 2017.

With companies such as Rio Tinto Plc (RIO) , BHP Billiton (BHP) and Vale SA (VALE) producing more iron-ore than ever, the investment bank forecasted a surplus of 82 million metric tons by next year that will send prices southward by nearly 20 percent to $115 per ton, then as low as $80 per ton by 2015.

Over the past decade of astronomical Chinese economic growth, iron-ore miners often experienced difficulty keeping up with demand, and shortages have been experienced in seven of the last eight years. The recent industry-wide trend of significantly upping ore production was a response to this scenario, as well as being a sign of faith in the sustainability of the Chinese economic miracle.

But Goldman’s 82 million-ton surplus estimate varies wildly from other forecasts. Deutsche Bank AG (DB) has come up with a figure of 27 million tons, while Morgan Stanley (MS) predicts an even lower 8.8 million tons, and UBS AG (UBS) rests on the opposite extreme of the spectrum with a forecast of over 150 million tons of surplus.

Goldman has also said that the coming drop in prices will not necessarily hurt profits for Australian miners, even though the country’s iron-ore industry will account for some 66 percent of next year’s supply increases. Indeed, mining companies in Australia as well as Brazil, both countries with poorly performing currencies, should see a reduction in local production costs resulting from weakening currencies.

Australia’s iron-ore industry was valued at nearly $57 billion for 2012, followed by Brazil, where cargoes amounted to $31 billion for the year. Furthermore, the notion of relenting Chinese growth is a relative one; according to the World Steel Association, steel use in China alone will grow 2.5 percent next year, shy of 2013’s 3.5 percent but a strong figure all the same.

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Symbol Name Price Change % Volume
BHP BHP Billiton Limited 35.02 0.37 1.07 766,451
CMBVF CMMB Vision Holdings Ltd n/a n/a n/a 0
DB Deutsche Bank AG 14.65 0.16 1.14 3,015,387
GS The Goldman Sachs Group Inc. 177.36 -0.39 -0.22 758,601
MS Morgan Stanley 33.76 -0.07 -0.19 4,625,374
RIO Rio Tinto Plc 34.80 0.56 1.62 1,325,953
UBS UBS Group AG Registered 14.38 0.40 2.83 1,797,304
VALE VALE S.A. American Depositary Shares Each Represen 7.01 0.06 0.79 13,781,427


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