By Manolo Serapio Jr
MANILA, May 6 (Reuters) - Goldman Sachs (NYSE:GS) raised its 2016 price forecast for iron ore by 19 percent to $47 a tonne, saying renewed strength in China's steel demand would help stave off an oversupply in the raw material.
Iron ore has benefited from a rally in China's steel prices this year, led by a seasonal pickup in demand and tighter supply of the alloy after shutdowns by some mills in the past year. Spot iron ore gained further momentum from a sharp surge in Chinese steel and iron ore futures in mid-April. a recent retreat, spot iron ore .IO62-CNI=SI remains 39 percent up this year at $59.50 a tonne currently.
"Increased spending in the old economy and the resulting boost to consumption now appears likely to keep the steel complex in balance for the rest of the quarter," Goldman said, referring to China.
It lifted its price forecast for iron ore, a steelmaking raw material, for the second to the fourth quarter by 14-47 percent from prior estimates.
In April, Goldman had forecast a drop in iron ore to $35 a tonne by end-2016, saying the rally was unsustainable in the absence of a material increase in Chinese steel consumption that can absorb additional supply from mine expansions in Australia and Brazil. the investment bank said on Friday that iron ore prices could remain high in the third quarter, while cautioning that would require further growth in steel demand at a time when consumption is seasonally weaker.
Goldman kept its iron ore estimates for 2017 and 2018 unchanged at $35.
"In our view, the type of stimulus necessary to keep steel raw material prices above their respective cost curves are similar to 2009, a period where China's steel stock was lower, economic growth was stronger and investment as a share of GDP was higher," the bank said in a report.
"We believe the need to deleverage the economy and allocate capital efficiently make it difficult to sustain such a policy reversal."
Goldman was more optimistic on metallurgical coal, another steelmaking ingredient, raising its 2016 price estimate for the commodity by 10 percent to $82 a tonne and its 2017 forecast by 6 percent to $83. It hiked its 2018 view by 3 percent to $85.
"The supply-side response to overcapacity had a two-year head start on iron ore, so a return to balance is likely to happen first in coal," it said.