Goldman Sachs sees ‘clear deficit’ of iron ore for the rest of 2024

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 ($US139 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,” the report said.

“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.

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 per cent 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 per cent.

Goldman now expects the full-year average for the benchmark 62 per cent-grade iron ore to surge from $US101 per tonne to $US117 in 2023. For 2024, analysts are expecting a 22 per cent jump from their previous forecast of $US90 per tonne to $110.