Iron Prices Take a Hit on Oversupply

Iron Prices Take a Hit on OversupplyIn what Goldman Sachs (NYSE:GS) is calling the end of the "Iron Age," iron ore prices have fallen 38 percent so far this year. And, if weak demand continues, they could keep dropping.

"In our view, 2014 is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean; in other words, the end of the Iron Age is here," Goldman analysts Christian Lelong and Amber Cai said in a report on Wednesday.

Partially accounting for the low price environment is growth in supply from low-cost global miners — that's sent supply well past the demand levels stemming from China, iron's top consumer. Specifically, major producers like BHP Biliton (NYSE:BHP,ASX:BHP,LSE:BLT) and Vale (NYSE:VALE) are hoping to prevail by ramping up volumes at their operations. As The Wall Street Journal notes, "[t]he volume war boosts their absolute profits, but by adding to the glut, prices will take longer to recover."

On the demand side, Ren Zeping, an analyst at Guotai Junan Securities, told Reuters, "[i]mport demand for commodities has slumped even on the back of falling prices, reflecting soft domestic demand. The outlook for the commodities sector remains weak in the face of the economic slowdown."

Meanwhile, the WSJ has cautioned investors that China does not look to be on the path to increasing its demand for iron any time soon. The publication highlights that the country could even look to meet part of its demand needs by turning to the scrap metal market. While China hasn't delved too far into recycling its old cars, appliances and construction materials, the news outlet points to the country's monumental growth over the last decade as an indicator that there is likely to be a lot of scrap available.