China’s real estate crisis will cause a more severe downturn in iron ore prices: Goldman Sachs

A severe surplus in the iron-ore market caused by the renewed pressure in China’s property market will sink prices of the commodity over the second half of the year, Goldman Sachs analysts warned this week.

The iron ore market is on track to see 67 million tons of excess supply over the remainder of 2022, after a deficit of 56 million tons in the first half, which reflects “a combination of both extended property related onshore demand weakness and a sharp deceleration in ex-China steel demand, compounded by a largely unchanged supply path,” a team of Goldman Sachs strategists led by Nicholas Snowdon wrote in a client note on Monday. 

Strategists also trimmed their iron ore price targets over the next three and six months to $70 and $85 a ton, respectively, from $90 and $110 per ton. The benchmark 62% Fe fines TIOQ22, +1.18% imported into Northern China traded at $106.01 on Wednesday.

According to Goldman, iron ore is tied to early cycle property activity in China more than any other global commodity as the sector generates close to a third of China’s steel and iron ore demand. The country’s real-estate market has worsened in the last several weeks as many home buyers refused to pay their mortgages for uncompleted apartments. Property construction has slowed since the beginning of the COVID-19 pandemic as the country’s “zero-COVID” policy, under which full or partial lockdowns are imposed in major cities, left home developers unable to complete and deliver properties to buyers.