Friday, April 17, 2015

The future of iron ore prices

Today's short post picks up one of the stories around at the present time.

On Macro Business,  Houses and Holes' reports on the latest iron ore report From Goldman Sachs: Goldman destroys iron ore, RIO forecast.

This graphic shows the Goldman Sachs' forecast, back to the 1983-2004 average. It also shows the sheer scale of the iron ore price boom.

Will iron ore prices go back to the long term average price? Probably not, although it may be a lot lower than the peak.

This is my forecast for what it's worth. The big three are ramping up production. That will, as GS suggests, drive many of the midsize producers out of the market. As prices stabilise, the big producers will stabilise production. They will then reduce production to around the point at which the rising per unit costs flowing from  reduced volume equals the rise in price. Beyond that point, profits fall.

Of course, it won't be as exact as that. If prices really skyrocket, they will expand production to damp price increases and to stop others entering the market place.If they get it really wrong, we will have another boom. .      

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