This has been caused by a reasonably sharp pullback in iron ore prices from their recent highs.
Where next for iron ore prices?
The Goldman Sachs commodities team has been looking into iron ore and has made some changes to its forecasts for the steel making ingredient.
Its team is now expecting a recovery in Brazilian exports and a Chinese environmental policy driven slowdown in steel production to narrow the seaborne iron ore deficit in 2021.
Instead of a 27Mt deficit, it is now forecasting a 9Mt deficit for the year. However, due to the strong start that iron ore prices have had in 2021, it has modestly upgraded its 2021 forecast to an average of US$135 per tonne. Goldman was previously forecasting US$120 per tonne.
Looking further ahead, the broker is forecasting a clear surplus in 2022 instead of another deficit. Its analysts have pencilled in a 23Mt surplus next year, compared to an 8Mt deficit previously. Whereas in 2023 Goldman Sachs expects the surplus to increase to 49Mt.
In light of this, its analysts are forecasting an average iron ore price of US$95 per tonne in 2022 and then a long run iron ore price of US$65 per tonne.
Fortunately for Fortescue and other iron ore producers, Goldman believes that in the near term, ongoing strong demand from China (for infrastructure and property) and mill margin strength should limit the sustainability of any iron ore sell-off in the next few months. Furthermore, China's environmental policies should provide more support for higher grade ore versus lower grade 58% ore.
Should you buy the miners?
Taking all that into account, the broker is still recommending investors buy BHP shares.
It has a buy rating and $53.40 price target on the Big Australian's shares. This compares to the latest BHP share price of $47.88.
As for the others, Goldman Sachs has a neutral rating and $20.40 price target on Fortescue's shares and a neutral rating and $118.80 price target on Rio Tinto's shares.
"The higher 2021 Fe forecast (US$135/t) has resulted in upgrades to our EPS estimates, NAVs and 12-m TPs for the 6 iron ore stocks under coverage. Although we are calling for a c. US$50/t or 30% drop in iron ore by year-end, we think the ongoing recovery in global steel demand in 2Q means it is too early to become bearish on the iron ore sector considering the strong FCF/dividend yields in 2021 (average 10%/7%) and 2022 (average 7%/6%), despite the sector trading at 1.15x NAV."
"BHP and RIO are trading on 5.5-6x, still below the 25-yr historical average of 6.5-7x, with FMG appearing overvalued at 8x compared to its historical average of 5x. Therefore, we see the drop in iron ore price as mostly priced into BHP and RIO already. 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."