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Goldman sees iron ore slumping 30% on supply, steel outlook

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Goldman Sachs Group Inc is sticking with its bullish view on Chinese stocks in Hong Kong, saying valuations are inexpensive and improving economic data will spur a rebound.

[BEIJING] Iron ore prices may tumble about 30 per cent over the next 18 months as supply expands while steel output falters, according to Goldman Sachs Group Inc, which said the impact on the market from China's devaluation was a sideshow.

"Supply is likely to diverge further from demand," analysts Christian Lelong and Amber Cai wrote in a report. "Contrary to market consensus, we believe that peak-steel production will be followed by a contraction" in China, they wrote, sticking with price forecasts for the next four quarters.

Iron ore rebounded over the past five weeks from the lowest level since at least 2009 as steel prices advanced in China and shipments from the top exporters, Australia and Brazil, lagged behind expectations. China's government devalued the yuan last week, roiling commodities markets and spurring concern that import demand for dollar-denominated raw materials may drop.

"Arguably, the yuan devaluation and the recent supply disruptions are what we consider a sideshow for the iron ore market," the analysts said in the Aug. 14 note. "Supply growth will resume in the short term." Ore with 62 per cent delivered to Qingdao rose 0.6 per cent to US$56.74 a dry metric ton last week to post a fifth straight climb, Metal Bulletin Ltd data showed. While the price hit US$57.02 on Thursday, the highest since July 1, after blasts in the Chinese port of Tianjin, they're 20 per cent lower this year.

Iron ore was seen by Goldman averaging US$49 a ton this quarter, US$48 in the final three months of 2015, US$46 in the first quarter of next year and US$44 the following quarter, according to the Aug 14 report. That's unchanged from a July 20 note from the bank. The 2016 forecast of US$44 was also retained.

Steel production in China typically drops in the third quarter on the back of seasonal cycles, the analysts said. At the same time, iron ore supply growth will resume as operational issues that had held up some output are resolved, they said.

Iron ore futures on the Dalian Commodity Exchange dropped 1 per cent on Monday. Hebei province has notified 3,785 companies to halt or cut output to ensure air quality before a parade in Beijing next month, according to two people who received the notice. The region is the largest steel producer in China.

Australia & New Zealand Banking Group Ltd. recommended bets on iron ore losses in a report last week, targeting a retreat to less than US$50 a ton. Recent gains in prices will probably prove to be short-lived, according to Morgan Stanley.

"The next phase of balancing will require a further 30 per cent price decline over the next 18 months, on our forecasts" Goldman's Lelong and Cai wrote. "The summer of 2015 is the calm before the storm."