Investment banker Goldman Sachs has lowered the price outlook on iron ore and predicted the price would stay below US$40 (AU$55) a tonne for the next three years as China's slowdown will continue to take the industry into a long period of hibernation.

The forecast says iron ore price will average $US38 (AU$52) a metric tonne in 2016 and US$35 (AU$48) in both 2017 and 2018. Analysts Christian Lelong and Amber Cai wrote in the forecasts that the price would crash 13 to 14 percent lower than the bank's previous outlook, reports CNBC.

“The short-term outlook remains exposed to the deteriorating health of the Chinese steel industry. Record export volumes have failed to fully offset a material decline in domestic demand, and operating margins have been under pressure for most of the year,” wrote the analysts.

On Dec. 12 iron ore prices tumbled to US$37 (AU$51) a tonne, which was the lowest since 2008, hit by the slowdown in China’s construction sector.

“The iron ore sector may have to hibernate for an extended period before alternative steel markets in other regions take over from China and usher in the next bull market,” the analysts wrote, pegging the long-term forecast at US$34 (AU$47) a ton.

Risks ahead

The downgrade in price also pegs cut in supplies with seaborne mining capacity coming down by 250 million tonnes or 18 percent of the current supply in the next three years. The marginal cost of production for a ton of iron ore will become US$35 (AU$48). The investment bank also predicted many mine closures in 2016 with producers coming under negative cash flow, finding the going tough as alternative funding sources will be drying up.

However, the Goldman analysts said closures and planned cuts, amounting to 15 million tonnes a year from producers BC Iron and Kumba Iron ore will not be enough to offset the bearish sentiment among steel mills and traders in China. That market is facing tight liquidity and depressed profit margins.

Among the significant downside risks on demand will be the bulging Chinese steel stocks. If steel stock per capita stabilises at 10 tons by 2040, from the current 5.6 tonnes, steel consumption would strike an equilibrium at 600 million per annum. That will be down by 17 percent from 2014 levels and scrap recycling will be 47 percent of Chinese steel production by 2040, that is 36 percent higher than today, observed Goldman Sachs.

Over supply

Besides the falling demand from China, the surging output of largest miners such as Rio Tinto Group and BHP Billiton of Australia and Brazil's Vale is also adding to the glut, noted The Australian Financial review.

However, Rio Tinto’s sees no hard concerns over China's growth trajectory. Its chief executive officer Sam Walsh has said China’s steel intensity will rise further and steel demand in the rest of the world will grow 65 percent in the next 15 years.

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