Commonwealth Bank of Australia (ASX: CBA) suggests that the price of iron ore may experience a downturn, with analysts warning of the possibility of a drop to $US80 per tonne.
This forecast could spell trouble for major ASX-listed iron ore producers BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Ltd (ASX: FMG).
Each of these stocks is in the red this year amid a weaker iron ore price and sluggish global demand.
Let's take a look.
Iron ore price at risk of falling sharply
The iron ore price currently hovers around US$92.26 per tonne. Commonwealth Bank's Dhar suggests a further slide could be imminent.
Dhar projects a potential US$80 per tonne iron ore price, marking a 13% decline from current levels.
The key driver here is weak demand from China, which has been struggling with underwhelming industrial output, retail sales, and fixed asset investment, according to The Australian.
In August, China's property sector—a major consumer of steel—reported a 17% decline in new construction starts, continuing its downward trend from July. This has impacted the iron ore price.
China's infrastructure sector, another significant contributor to steel demand, hasn't picked up the slack either. Dhar says investment in this sector contracted in four of the last five months.
This could indicate a simultaneous slowdown in both infrastructure and property construction.
Based on the current supply structure of the iron ore market from BHP's latest economic and commodity outlook, a sustained 8 per cent/year fall in China's steel production would justify $US90/t. A sustained ~10%/year decline in China's steel production would justify $US80/t.
Whilst the bank projects relatively stable prices for the remainder of 2024, this outlook hinges on China's central government bank maintaining the level of infrastructure spending.
What does this mean for ASX iron ore shares?
It's not just the demand side hitting the iron ore price. It's also the supply side.
Brazilian mining giant Vale recently increased its production guidance for 2024, raising concerns about oversupply.
Vale's new forecast for 2024 is between 323 million tonnes (mt) and 330 mt, up from the previous estimates.
The mid-point of this guidance represents a more than 3% increase in annual production.
So we have a combination of softer demand and increased supply – a classic recipe for falling commodity prices.
And the drop in the iron ore price to the low US$90s has already impacted the profitability of ASX iron ore miners. A further dip could mean more pain for these stocks in the short to medium term.
Foolish takeaway
Commonwealth Bank's forecast of a potential drop in iron ore prices to US$80 per tonne paints a challenging outlook for ASX iron ore shares like BHP, Rio Tinto, and Fortescue.
All of these shares are in the red over the past year.
