Goldman Sachs: there is still room for a bull market in commodities, only iron ore will plunge 20% in the first half of next year.

Goldman Sachs remains bullish on commodities, with the exception of iron ore. The price of iron ore, a raw material for steel, will be affected by output restrictions by steelmakers under China's emissions reduction policy and will fall further in the future, the bank said in a recent research report.

Goldman Sachs expects iron ore prices to plunge 15% and 20% in the first half of next year. The report revised the target price of iron ore with a grade of 62% for three months, six months and twelve months to US $135 per tonne, US $115 per tonne and US $100 per tonne, respectively.

On a full-year basis, the price forecast for 2021 will be raised from US $120 / ton to US $135 / tonne, and the price forecast for 2022 will remain unchanged at US $95 / tonne. The current price of iron ore with a 62% grade is more than US $160 per tonne.

The expansion of the full-year forecast decline suggests that price falls are likely to remain moderate this year and accelerate sharply next year.

The research newspaper pointed out that iron ore is expected to face oversupply by 2022. It lowered its forecast global iron ore supply shortage from 27 million tons to 9 million tons this year, sharply raised its forecast supply surplus to 23 million tons next year from 8 million tons, and expects a larger surplus of 49 million tons in 2023.

The expansion of the full-year forecast decline suggests that price falls are likely to remain moderate this year and accelerate sharply next year.

The research newspaper pointed out that iron ore is expected to face oversupply by 2022. It lowered its forecast global iron ore supply shortage from 27 million tons to 9 million tons this year, sharply raised its forecast supply surplus to 23 million tons next year from 8 million tons, and expects a larger surplus of 49 million tons in 2023.

Steel mills reduce emissions, reduce iron ore demand and slow down imports

Goldman Sachs said the sharp fall in iron ore futures contracts triggered by an emergency meeting of the Tangshan municipal government on environmental protection reflected concerns about imminent policy constraints in China's steel industry.

According to the requirements of the meeting notice, from the 9th to 11th, industrial enterprises are required to implement production suspension measures in accordance with the first-level red warning response. After the meeting, Dalian iron ore futures in the inner market immediately hit the limit, and iron ore on the Singapore Exchange also hit an one-month low.

The production limit of steel companies was extended two weeks ago. The latest emission reduction measures issued by steel companies in Tangshan show that the proportion of emissions reduction by steel companies in the whole process is required to reach 30% to 50% from March 20 to December 31.

Goldman Sachs believes the policy highlights broader concerns about changes in China's environmental policy and its impact on the iron ore market, with a growing expectation of new environmental policies. medium-term alternative capacity ratios and energy-saving targets for the steel industry may be further emphasized, continuing to reduce demand for raw material iron ore.

The bank believes that the medium-term impact of this policy could slow China's iron ore imports. Although iron ore imports rose nearly 3 per cent from January to February compared with the same period last year, like steel production, it is expected to slow in the second half of the year. China's iron ore imports in 2021 will be basically the same as the previous year, close to 1.2 billion tons. Iron ore imports are expected to decrease further in the next two years.

However, Goldman Sachs expects the growing focus of environmental policies on the steel industry to play a broad role in improving the quality of iron ore inputs, with imports of high-quality iron ore slowing relatively slightly.

Short-term profits of steel mills rise, curbing the fall in iron ore prices

However, Goldman Sachs believes that strong onshore steel demand and improving profit margins will temporarily curb the fall in iron ore prices.

Weekly demand for onshore steel products has accelerated so far this year compared with 2020 and 2019, especially as a seasonal recovery in construction activity after the Lunar New year has led to lower inventories and improved steel mill profit margins from the weak performance at the start of the year. At the same time, the recovery in industries such as infrastructure and real estate, automobile manufacturing and home appliances is also supporting demand for steel.

Against this backdrop, Goldman Sachs forecasts that Chinese steel demand grew at an annualised rate of 5 per cent in the first half of the year. Although the growth is expected to peak in May-June and slow slightly to 2-3 per cent in the second half of the year, it is still higher than Goldman's forecast for steel production growth in 2021 (1.2 per cent), so Goldman Sachs believes that steel supply remains tight in the second half of the year and profit margins are likely to improve further.

Given that iron ore inventories in domestic steel mills are still relatively low, it is still possible to re-build up inventories if profit margins improve further in the short term, the bank said.