Markets: Supply sidelined

Goldman Sachs says that global iron ore oversupply will mean steel mills need less inventory, resulting in a falling spot price.

Goldman Sachs says the world’s steel mills are less concerned about iron ore supply and more concerned about their margins and cash flow. This will mean steel producers’ iron ore inventories will be smaller as their purchases in the spot iron ore market will shrink because the global seaborne iron ore market will be oversupplied from next year, the investment bank says.

Inventory levels at steel mills are falling to three to four weeks of use and steel producers’ gross margins are rising, says Goldman Sachs. It forecasts future destocking and restocking cycles at steel mills will be short-term. Last year’s iron ore destocking toward the end of the year is unlikely to be repeated, the Wall Street firm says.

“With the majority of iron ore production sold under volume contracts linked to the spot market, rather than into the spot market directly, (iron ore) producers have less influence in the spot market,” says Goldman Sachs.

“We estimate that in aggregate less than 10 per cent of total Australian production is actually sold into the spot market,” it says. “These shipments are then re-sold multiple times on the secondary market by traders and steel mills prior to reaching their final destination, with these secondary trades making up 60-70 per cent of total liquidity.”

Goldman Sachs forecasts the average spot iron ore price, 62 per cent iron content with cost and freight delivery to a Chinese port, in 2013 will be $US129 a tonne. In 2014 it will be $US108, in 2015 $US80, in 2016 $US82, in 2017 $US85 and $US88 in 2018.

Yesterday, the Tianjin spot iron price was $US130.90 a dry tonne.

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