MARKETS SPECTATOR: Goldman's iron sinker

Goldman Sachs sees a lower iron ore price than previously expected and has downgraded 12-month price targets for BHP Billiton, Rio Tinto and Fortescue.

In a commodities research note issued this morning, Goldman Sachs has moved to a more neutral outlook for iron ore prices from current levels and modestly lowered its 2013 average price forecast to $US139/t from $US144/t.

“Last year we forecast seaborne iron ore prices to recover from the downturn in the second half of 2012, and we also expected seaborne demand to benefit from a decline in Chinese iron ore production. Prices did strengthen, but domestic production has surprised us on the upside recently,” Goldman said.

While the broker is shifting to a more neutral view this year, it maintains its longer-term bearish view on the premise of a more robust iron ore production from domestic China and an expected surge in seaborne supply as the Chinese economy matures away from infrastructure developments the iron ore market is expected to move into structural oversupply by 2014.

So given the above views, Goldman has lowered its iron ore price forecasts for calendar 2013, '14 and '15 by 3 per cent, 11 per cent and 9 per cent to $US139/t, $US115/t and $US80/t respectively. On the back of this it has downgraded its 12-month price target for BHP Billiton by 2 per cent to $41.00, Rio Tinto by 9 per cent to $64.00 and Fortescue Metals Group by 13 per cent to $4.10.

Despite the target price downgrades, the broker has kept its buy recommendation on BHP Billiton and neutral rating on both Rio Tinto and Fortescue as it believes they are still appropriately positioned within its Australian stock coverage universe.  

Nonetheless, Goldman maintains its preference for BHP Billiton given its more diverse asset base, greater exposure to late-cycle commodities and lower exposure to iron ore.