Broking house Goldman Sachs has downgraded Rio Tinto (ASX: RIO) after revising down its expectations for future iron ore prices. The downgrade no doubt played a part in the 4.7% sell off in Rio’s London-listed share price and the 2% sell off on the ASX-listed stock.
Slowing demand in China for steel, coupled with iron ore oversupply as new mines come on-line, has Goldman Sachs forecasting that a tonne of iron ore will average US$80/ tonne by 2015. This compares with an average expected price for 2013 of around US$135/ tonne. It is quite a sharp turnaround by the analysts at Goldman Sachs who last year expected iron ore prices to recover from 2012 lows. The report explains, while retaining their assumptions of lower demand and increased supply, they now believe newer and larger domestic Chinese mines may be more viable with lower marginal costs than they previously assumed.
China watchers will be aware that the Chinese Government is currently trying to cool the housing market which has been at boom levels for quite a while. As house building and infrastructure spending is reigned in, significantly less steel and therefore iron ore is required. According to fellow broker, Citigroup, Chinese steel demand growth slowed from 20% in 2010 to just 2.1% in 2012; which is roughly in line with the long-term global historical growth rate and the growth rate Goldman Sachs believes iron ore demand will stay at for the foreseeable future.
On a day when the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) was down just 0.4%, the Rio downgrade looks to have taken its toll across the sector with all the iron ore majors sold off. BHP Billiton (ASX: BHP), Fortescue Metals (ASX: FMG) and Atlas Iron (ASX: AGO) were down 2.7%, 2.3% and 3.2% respectively.
When investing in mining companies, it is best to focus on the lowest cost producers, as they have the best chance of remaining profitable when commodity prices fall. As history shows, commodity prices will indeed, rise and fall.
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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Tim McArthur does not own shares in any of the companies mentioned in this article.
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