Iron ore prices heading down says Goldman Sachs: Is it time to dump the iron ore miners?

The investment bank projects prices to slide out to 2018, which could put smaller miners underwater.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

New Chinese economic data shows what's written on the wall for Aussie iron ore miners. First quarter 2015 GDP growth came in at an annualised 7.0%, a fair bit down from fourth quarter 2014 growth of 7.3%. The Chinese property market is sagging under the weight of excess construction and lower property purchases while steel exports weakened.

Both the property and steel sectors are indicators of flat iron ore demand in the face of a severe supply glut.

More pain coming

Investment bank Goldman Sachs sees only a worse future over the next three years. The Australian Financial Review reported the bank lowered iron ore forecast prices down into the US$40 per tonne range for the near term.

Even Federal Treasurer Joe Hockey is considering using a guide price of US$35 per tonne for the next budget projections, significantly down from the 2014 budget.

So, what's the prognosis? Goldman Sachs estimates the 2015 average iron ore price to be 20% down from its earlier forecast, reaching US$52 per tonne. 2016 and 2017 should be worse, with a forecast average of US$44 and US$40 per tonne, respectively.

Since these are averages, actual prices could fall even lower to levels that could pinch the two biggest iron ore companies BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

At the mercy of the market

As for Fortescue Metals Group Limited (ASX: FMG), that trend would have the third-largest Aussie iron ore producer underwater since its all-in costs are estimated to be in the US$50s.

Likewise, the next lower tier of producers have even less hope if prices don't recover soon. Atlas Iron Limited (ASX: AGO) will be ceasing mining operations to conserve cash. BC Iron Limited (ASX: BCI) continues working, but said this week it wouldn't shy away from suspending operations if it's best for shareholders.

As you can see, if the investment bank's projections turn out to be correct, we're still far from a market bottom. That's why investors shouldn't be bargain hunting in the iron ore sector.

Better stock picks

Easier gains could be achieved in growth industries like telecommunications and healthcare, with companies such as Telstra Corporation Ltd (ASX: TLS) or ResMed Inc (CHESS) (ASX: RMD). Both are expanding overseas and have good long-term prospects, so I would suggest these much more than any iron ore miner.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.  We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policyThis article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »