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.

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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.

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