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Goldman Sachs thinks the worst may be over for BHP Billiton and Rio Tinto

It isn’t FANNG or WAAAX that is giving investors the most pain during the market meltdown over the past month – it’s the miners.

The mining heavy materials sector is the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index over the period with the BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) share price tumbled.

FANNG is a term of endearment for high-flying US tech stocks like Facebook, Inc. and Netflix, Inc. while the ASX version of WAAAX include the likes of the WiseTech Global Ltd (ASX: WTC) share price, Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) share price – just to name a few.

Why miners are in a deep hole

The miners took a bigger beating on fears of an iron ore price crash as the risk of global economic growth (particularly China) hits the skids jumped from the escalating trade war.

The collapse in the profitability of Chinese steel mills (the main consumers of iron ore) added to the gloom with some analysts warning that there’s no respite for the industry.

Indeed, the 62% Fe iron ore price crashed close to 20% since November to a low of around US$64 a tonne before staging a modest recovery in the past few days to a little over US$67 a tonne.

The bounce for the lower grade 58% Fe ore enjoyed a stronger bounce with the discount between the low- and high-grade ore continuing to narrow, much to the pleasure of Fortescue Metals Group Limited’s (ASX: FMG) shareholders.

Light at the end of the tunnel?

The underperformance of our iron ore miners may soon be coming to an end though as Goldman Sachs believes the iron ore price has found its feet, according to a news report in Business Insider Australia.

“We think most of the correction is behind us and we maintain our view of a US$60-70 a tonne range-bound market,” said commodity analysts at Goldman Sachs in relation to the benchmark price.

“We forecast US$70 a tonne over the three-month horizon as restocking needs after the winter cuts and seasonally weak supply support iron ore prices in the first quarter of 2019 before eventually falling.

“Our three, six and 12-month forecasts are US$70, US$60, and US$60 a tonne.”

The recent tentative recovery in the commodity was triggered by speculation that the Chinese government would insist on a greater than expected cut in steel production from plants in Hebei province – the steel production central of China.

Goldman’s forecast aligns with my view that ASX miners will outperform over the next few months and I remain overweight on the sector.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. The Motley Fool Australia owns shares of Altium, WiseTech Global, and Xero. 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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