Why Goldman Sachs Advises Investors to Take Profits in Iron Ore

Like most other analysts, Goldman Sachs (GS) also increased its price forecast for iron ore due to the supply disruptions in Australia and Brazil (EWZ). It increased the price targets for iron ore as follows:

• Three-month: from $80 to $85
• Six-month: from $75 to $80
• 12-month: from $65 to $70

The bank, however, is not equally optimistic about the longevity of the current iron ore price rally. After iron ore prices hit $93.1 per ton on April 3, Goldman Sachs recommended investors pocket gains. While the bank believes that the prices can go higher from here, it recommends investors take profits.

Goldman Sachs’s cautious long-term view is likely based on the fundamental demand-supply scenario in the seaborne iron ore market. While supply disruptions have improved the short-term outlook, the long-term view hasn’t changed much. On one hand, supply tightness will go away as other smaller miners increase their production to take advantage of higher prices. On the other hand, China’s demand scenario is not expected to improve much.

This scenario could lead to reasonable iron ore prices that are high enough to sustain big and quality miners such as Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO) but not high enough to incentivize marginal miners to crop up again.