Goldman Sachs: Iron ore rally a window to sell short

By Jasmine Ng
Iron ore
Iron ore mining.

(Bloomberg) — Iron ore’s rally from a decade-low offers investors an opportunity to bet against the commodity as prices will resume their decline on weak demand and rising supplies, according to Goldman Sachs Group Inc.

“Market fundamentals will reassert themselves sooner rather than later,” analysts Christian Lelong and Amber Cai wrote in a report on Monday. “Investors may consider this as a window to take short positions.”

Iron ore rallied into a bull market last month, rising 30 percent from an April 2 low, as BHP Billiton Ltd. said that it would curb the pace of its expansion and Vale SA signaled it may cut some higher-cost output. The gains came as China boosted stimulus to combat a property-led slowdown, and stockpiles held at ports in the country fell to the lowest level in more than a year. Prices remain 68 percent below a 2011 record amid a global glut and concern that demand in China may have peaked.

“The structural drivers of the iron ore price trump cyclical drivers and they are unchanged since mid-2014: demand is lackluster, supply growth continues and prices must overshoot on the downside to force high-cost mines to close,” Lelong and Cai wrote. The endgame remains the same, they said.

Ore with 62 percent content at Qingdao, which bottomed at $47.08 on April 2, rose 1.7 percent to $61.40 a dry ton on Friday, data from Metal Bulletin Ltd. showed. Prices climbed 9.3 percent last week, narrowing this year’s drop to 14 percent.

Prices are likely to see an acute decline again later this year and will eventually retest $47, Wolfe Research LLC analyst Gordon Johnson wrote in a note last week. Recent production announcements from Vale and BHP are cosmetic and will do little to address oversupply, according to Investec Plc.

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