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Citigroup upgrades its iron ore price forecasts even as the market crashes

There could be a silver (or maybe steel) lining to the latest meltdown in the mining sector due to a plunge in iron ore and steel prices.

The negative sentiment has weighed heavily on our largest iron ore miners BHP Billiton Limited (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price.

While there are fundamental factors that are pushing the iron ore price lower, this hasn’t stopped Citigroup from upgrading its price forecast for the commodity.

Steely resolve

That appears to be a pretty gutsy move given the level of pessimism as Chinese steel mills (the biggest clients come under significant financial pressure.

But there’s too much bad news priced into the mining sector, according to Citi’s analysts who have lifted their iron ore price assumptions for the next three years even as they believe the iron ore price will ease from current levels.

“Citi’s Commodities team has made modest upgrades to our bulk commodity prices for 2018-20 driven by China’s planned fiscal and monetary easing and a boost to infrastructure spending (12% of steel demand),” said Citi.

“Despite the upgrades, we still expect bulk prices to fade through 2019 and 2020 as trade barriers slow export driven growth and China’s property sector cools (40% of steel demand).”

The broker now predicts iron ore will average US$63 a tonne in 2019, or US$2 more than its previous forecast, while it lifted its 2020 prediction by US$5 a tonne to US$60 a tonne.

Citi also bolstered its coking coal price assumptions by US$20 a tonne in 2019 and 2020 to US$188 a tonne and US$170 per tonne, respectively.

“Equity prices have been driven by sentiment rather than physical prices,” said the broker.

“Despite bulks being the biggest driver of earnings and trading close to year to date highs, equity prices have more reflected the negative sentiment being felt by base metals towards the brake being put on global growth by the building trade war.”

Shares on the buy list

The diversified miners that Citi have a “buy” recommendation on includes BHP, Rio Tinto and South32 Ltd (ASX: S32).

Among the pure plays (those that only mine one commodity), the broker also favours Whitehaven Coal Ltd (ASX: WHC) over Fortescue.

Citi has a “buy” on Whitehaven and a “neutral” on Fortescue.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks 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 policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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