Iron ore is in a bull market — and it won’t run out of steam soon, says Goldman

Iron ore is in a bull market
Iron ore is in a bull market

SINGAPORE — Iron ore has been in a bull market for more than two years, and it’s not about to end soon, according to Goldman Sachs.

“It would be wrong to say that the bull market for iron ore, you know, is on the cusp of ending,” said Nicholas Snowdon, head of base metals and bulks research at the investment bank.

It will likely only return to a “comfortable position” from 2023, Snowdon saidon Tuesday at the Singapore Iron Ore Forum, which is part of Singapore International Ferrous Week.

The bull run started with a supply shock from the Brumadinho dam disaster in 2019, but is now a “material bull market,” Snowdon said, referring to the deadly collapse of a dam in Brazil involving mining giant Vale. Iron ore prices surged in the aftermath of the catastrophe.

Prices are now being supported by very strong demand and suppliers have been disciplined in not increasing production, he explained, adding that inventories are also very low.

China’s benchmark iron ore futures have hit record highs this year. The most active iron ore futures contract on the Dalian Commodity Exchange, for September delivery, was at 1,241 yuan ($192) up 1.88% at 3pm Beijing time on Friday.

“It’s not really going to be until 2023, 2024, that the iron ore market will be kind of back to a more … comfortable position,” Snowdon predicted.

‘Incredibly strong’ demand growth

Demand for iron ore — a raw material that’s used to make steel — has been strong and that trend appears on track to continue into next year, Snowdon said.

He pointed out that Chinese steel demand growth has surprised to the upside for three years.

“Importantly, even as China shows some signs of decelerating in … steel demand growth rate in the second half of the year and into 2022, the rest of the world and (developed market) steel demand dynamics are incredibly strong,” he said.

That “above-trend demand growth rate” is likely to be sustained through 2022, in part because steel will be an important raw material in building green infrastructure, Snowdon said.

On the supply side, he said supply growth has not responded to high prices, and producers have been disciplined when it comes to capital expenditure.

“When you look forward over the next two, three years, supply growth rates will actually decelerate … from where they stand today,” he said. “There is not an imminent risk of major supply response in the iron ore market and that’s very key to the … outlook for price.”

Rohan Kendall, head of iron ore research at Wood Mackenzie,echoed the same sentiment

“The Australian producers have almost maxed out their infrastructure availability, so they can’t expand at any pace,” he said during a separate panel discussion.

Meanwhile, production from Brazil’s Vale is likely to remain constrained as the metals and mining firm continues to manage issues related to the dam disaster two years ago.

Kendall said the company is still facing challenges that will take a few more years to work through.

Goldman’s Snowdon said iron ore has a “robust underpin” and a “gradual softening fade” ahead. Prices will soften only when demand growth rates decelerate, he added.

“For now, it looks like a very tight market with a very strong underpin from supply demand, and still robust demand growth rates,” he said.

Unsustainable prices

Iron ore prices are not likely to stay above $200 per ton, said Kendall and Erik Hedborg, principal analyst at commodities intelligence firm CRU.

“If we’re looking ahead — sort of 12 months — I don’t think we’ll see a collapse in the iron ore price,” said Kendall.

“I think prices over $200 a ton are unsustainable, but we’re likely to see prices stay around $150 a ton,” he said. Those levels are still “extraordinarily high” by historical standards, he said.

CRU’s Hedborg agreed that prices will remain high.

“Obviously not the $200 per ton that we’re seeing right now, but we’re definitely going to see prices over $100 per ton for the rest of this year,” he said.

Snowdown did not give any price targets, although a bull market typically ends when prices fall 20% from the peak.


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