Slowly but surely the world is coming back to my bulk commodity forecasts. Goldman Sachs is the latest, materially dropping its forecasts for iron ore, coking and thermal coal today. The rationale is straight from the MB playbook:
As demand growth remains lackluster and several commodity markets move into surplus, the timing and scale of the future supply response becomes the main catalyst for an eventual recovery in prices, in our view. For some commodities, the path towards a balanced market and mid-cycle prices is complicated by the resilience of marginal producers in the face of operating losses and by the delivery of growth projects approved and financed in previous years. Besides, the focus of mining companies on productivity improvements as a way to remain competitive, together with a depreciation of some commodity currencies such as the A$, can lead to a lower marginal production costs.
For iron ore:
We downgrade our price forecasts to US$120/t for 2H 2013 (down 9%) and US$108/t in 2014 (down 7%) to account for the apparent end to the latest round of restocking and the impact of low steel prices on operating margins in the Chinese steel sector. Our views for 2015 and beyond remain unchanged (edit: at $80).
For coking coal:
We expect a relatively long period of adjustment before the market crawls back to a balanced supply/demand position. Seaborne producers have experienced several months of operating losses while they try to reduce costs and improve productivity. A lower cost curve in Chinese met coal, higher production volumes in Australia, a weaker A$ and the closure of marginal mines in the US and Australia has shifted cost support to US$150/t for premium coking coal; the completion of 3 large growth projects in Australia in a market with limited demand growth and a more competitive Chinese sector will have to be offset by further cuts, in our view.
For thermal coal:
The price cap and cost support have fully converged and we expect prices to be range bound for the duration of our forecast period. At one end, the Chinese thermal coal market is well supplied, cost inflation appears to have come to a halt and demand growth has moderated. As a result, the price cap set by China has come down to ~$85/t for benchmark Newcastle coal. On the supply side, the pressure to improve competitiveness and reduce unit costs, combined with a weaker A$, has reduced our estimate of cost support to $85/t (vs. $90/t previously).
My own view is that these forecasts still remain too high. Iron ore is probably about right, though I expect lower prices to be arriving this time next year, not 2015. The coking coal bottom is more like $110 in my view. Thermal coal will probably bottom in the mid $60s.
The coal prices will perhaps rebound to around Goldman’s forecast levels in time. Iron I expect to sit at $80 in the long term, but not until after blood has flowed through the gullies of the Pilbara.
