Goldman Sachs (GS) published a note on iron ore on September 25, 2017. Commenting on the most recent falls in iron ore prices, the firm noted that the prices have further to fall. They added that the impending steel capacity cuts in China planned for winter months will hurt demand. Goldman Sachs analysts also feel that the market hasn’t fully factored in the negative impact from environmental restrictions. In addition, the firm mentioned that the supply side could expand further. Both these factors combined mean significant pressure on iron ore prices. GS is estimating seaborne iron ore prices will fall to $60 per ton by the end of 2017.
While GS has turned bearish on iron ore, Morgan Stanley (MS) believes that the recent pullbacks in commodity prices (COMT) could be a good opportunity to enter the sector. The firm was already expecting a downtick in iron ore prices in the third quarter. After taking these price falls into account, the firm prefers diversified miners such as Rio Tinto (RIO), BHP (BHP), and South 32 (SOUHY). MS also reiterated its “equal weight” rating on Vale SA (VALE) recently.
Commonwealth Bank also agrees with GS’s view of pressure on iron ore prices as the deadline for steel capacity cuts in China draws near. Commonwealth analyst Vivek Dhar noted that when the capacity cuts come into effect on November 15, 2017, the spare capacity in the Chinese steel sector will be squeezed, which will be negative for iron ore prices. According to him, the action plan outlined in August is looking to cut the utilization rates at blast furnaces to 50% in some key steel-producing cities of China. This should also lead to higher grade ore outperforming lower grade ore.