Major investment bank Goldman Sachs has made an exciting prediction for the iron ore price, which could have big implications for S&P/ASX 200 Index (ASX: XJO) mining shares. These include BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG), and Mineral Resources Ltd (ASX: MIN).
As miners, changes in commodity prices can have a significant impact on company financials. In simple terms, it generally costs the same amount of money to mine a tonne of iron, so extra revenue for that production largely adds straight onto net profit before tax.
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Goldman predicts a strong iron ore price
According to reporting by the Australian Financial Review, Goldman Sachs is predicting the iron ore market could swing to a "significant" deficit in the second quarter of 2023.
A seasonal boost in Chinese steel production during March and April could happen at the same time as a "near-term" supply squeeze, which may mean that there's a 35 million tonne deficit in the second quarter.
Goldman has a three-month target of US$150 per tonne for the iron ore price, while the six-month target is US$135 per tonne. That means that the iron ore price could rise by 20% over the next three months, and almost 10% over the next six months. That sounds like good news for ASX 200 iron ore shares.
The AFR reported that Goldman points out that since the start of the fourth quarter last year, onshore iron ore inventories have fallen by 45 million tonnes to sit almost 30% below the prior corresponding period, the weakest since 2016.
But these prices are because of seasonal patterns rather than a strong recovery from China's property market. However, Chinese steel production is increasing, with blast furnace utilisation rates increasing in February compared to January.
The iron ore price is not expected to go above US$200 per tonne, unlike 2021.
Metals strategist Nicholas Snowdon commented that steel mills are suffering from iron shortages after destocking during the 2022 lockdowns:
This offers a significant right tail skew to the onshore iron ore stock cycle this year, likely providing a powerful amplifier to near-term price upside as supply chain confidence stimulates restocking appetite.
Iron ore possesses one of the most supportive fundamental setups into the second quarter across the industrial metals.
While we expect property-related new starts demand to decline less precipitously, we do not see reopening as a regime shift in ferrous as we expect for the rest of the base metals complex.
However, Goldman Sachs expects default rates to remain "high" in China, which could weaken the effectiveness of stimulus channels for property.
Is this a good time to buy ASX 200 mining shares?
The recent BHP result shows what a decline in resource prices can do – attributable profit fell 32% to US$6.5 billion, while the interim dividend was cut by 40% to 90 US cents per share.
It sounds like a promising time for iron ore miners, however the iron ore price may not stay that high for long according to the prediction. So, when the iron ore prices go back down, that could see the share prices fall, presenting a better opportunity.
