Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The crisis engulfing China’s property sector will help swing the iron ore market to a significant surplus over the second half of the year and push prices sharply lower, according to Goldman Sachs Group Inc.
The bank now projects an excess of 67 million tons of the steelmaking mineral for the rest of 2022, after a deficit of 56 million tons in the first half, reflecting both weakness in onshore real-estate and a sharp deceleration in steel demand outside China, according to a note on Tuesday.
Goldman also cut its three and six month price targets to $70 and $85 a ton, respectively, from $90 and $110 a ton. The bank said it expects the iron ore market’s current predicament to outlast the sell-off seen in 2021, although conditions are unlikely to get as bad as the 2014-15 bear market, which saw prices hit a low of $38 a ton.
The issue at hand is that iron ore is closely linked to early-cycle property activity in China, Goldman said. The government’s crackdown on excessive debt in the sector, which began about year ago, has morphed into a full-blown crisis, with mortgage holders now withholding payments on unfinished housing.
“This sector segment generates close to a third of China’s steel and iron ore demand, which in turn represents close to a quarter of global seaborne demand,” Goldman said.
Iron ore in Singapore rose almost 4% on Tuesday before paring gains to trade at $109.05 a ton, following the government’s move to establish a real estate fund to support developers. Traders were also responding to an improvement in steel mill margins after a fall in input costs, said Wei Ying, an analyst at China Industrial Futures.
Bloomberg Intelligence has a similar take on the impact of the property crisis on commodities markets. Among metals, steel may be hurt most in the third quarter by the mortgage boycott, as construction broadly accounts for 49% of Chinese demand. For aluminum, the proportion is 32%, and for copper it’s 9%.
Investors hoping that Beijing will quickly ride to the rescue of developers caught up in the mortgage crisis are likely to be disappointed, said Bloomberg Economics, as “the government will be loath to offer anything resembling bailouts that could encourage moral hazard.”
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