Soros Management opens positions in dry bulk shippers, Q3 2013

Why Goldman Sachs’ predicted 15% iron ore price fall helps Soros

Falling iron ore prices

Lower iron ore prices will be one of the major catalysts for higher dry bulk shipping rates in 2014. According to a recent Bloomberg article on Goldman Sachs’ forecast for iron ore prices in 2014, gold, iron ore , soybeans, and copper are all expected to drop at least 15% next year due to supply increases.

Iron Ore (62 Percent) Futures Curve 2013-11-22Enlarge Graph

Increased supply

Price decreases will mostly be visible later in 2014, as the analysts involved with the projection wrote. The impact of supply responses to the period of extraordinary price pressure (over the past few years) continues to flow through the system. A global seaborne iron ore surplus will emerge as supply increases over the second and third quarters, largely from big names like BHP Billiton, Vale, and Rio Tinto that make up more than half of the global seaborne iron ore trade. Brazil and Australia alone make up about 75% of the world’s iron ore exports.

Prices will drop 15%

Imported iron ore with 62% iron content last traded at around $136.23 on November 21, 2013. Based on the futures curve data for iron ore provided by the New York Mercantile Exchange, which shows contract prices for iron ore delivery at future dates, prices are expected to fall to $115.67 per metric tonne by the end to 2014. This is in line with Goldman’s forecast 15% decline in iron ore prices from the current level.

High returns on iron ore

The decrease in iron ore prices and an increase in iron ore production capacity from countries like Australia and Brazil—the lowest-cost producers in the world—would have a positive effect on dry bulk shipping volume. These major producers continue to expand, focusing on more profitable projects, because profits (margins) are just enormous. And as operations grow, these companies can capitalize on economies of scale.

Steel manufacturers to benefit

As Chinese iron ore producers are some of the most expensive-cost producers in the world, many will have to shut down when iron ore prices fall. Steel manufacturers, on the other hand, will benefit from lower iron ore input prices. So will the shipping companies that haul iron ore and people in China due to lower pollution emissions.