ASX iron ore shares have been on the nose recently and a warning by Goldman Sachs today will only add to the gloom.
Iron ore prices have been under pressure since China announced new curbs on steel mills to cut pollution.
This is why the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price have been backing away from their recent peaks.
But that's not the only thing that could keep ASX miners on a back foot.
Oversupply risk clouding ASX iron ore shares
"The GS commodities team now see a recovery in Brazilian exports and a Chinese environmental policy driven slowdown in steel production to narrow the seaborne iron ore deficit in 2021 (9Mt deficit vs. 27Mt deficit previously)," said Goldman.
"They now forecast a clear surplus in 2022 (23Mt surplus vs. 8Mt deficit previously), followed by a more sizeable 49Mt surplus in 2023."
Is this the time to be dumping these ASX shares? It's a fair question given that the major ASX miners have zoomed ahead of the S&P/ASX 200 Index (Index:^AXJO) over the past year.
When gloomy outlook leads to earnings upgrades
But despite Goldman's oversupply warning, the broker actually lifted its valuation on the sector.
This is because it believes the market will hold up reasonably well even with the excess supply. Goldman increased its price forecast for the steel making commodity by US$15 to US$135 a tonne for 2021 as prices have been stronger than it expected coming into this calendar year.
It left its 2022 price estimate unchanged at US$95 a tonne and modestly lifted its long-term price assumption to US$65 from US$62 a tonne.
Falling prices but reasonably positive outlook
"In the near term, ongoing strong demand from China (infra, property) and RoW, and mill margin strength, should limit the sustainability of any iron ore sell-off in the next few months," said the broker.
"China's environmental policies should provide more support for higher grade ore vs. lower grade 58% ore."
Foolish takeaway on ASX iron ore shares
As far as warnings go, this one seems to have more good than bad news. But I get the distinctive feeling that brokers are slowly falling out of love with iron more miners.
It was only yesterday that I reported that Macquarie Group Ltd (ASX: MQG) cut its exposure to iron ore from its model portfolio.
This was done to make space for ASX miners that produced metals needed in electric vehicles.
Goldman has a "neutral" recommendation on all the ASX iron ore producers, except for BHP.
"We maintain our Buy on BHP due to strong FCF, production growth and 30% EBITDA exposure to our bullish view on met coal, copper and oil," added Goldman.
The broker's 12-month price target on the BHP share price is $53.40 a share.
