When it comes to investing in the mining sector, three of the most popular options for investors are BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Ltd (ASX: FMG) shares.
These miners are popular because they have high quality operations and generate significant amounts of free cash flow when times are good. This free cash flow then allows them to reward their shareholders with big dividends.
However, all three mining giants are at the mercy of commodity prices. And one particular commodity has a major influence on their profitability and ultimately their dividends – iron ore.
And while BHP and Rio Tinto are diversifying their operations, the iron ore price still has a significant impact on their performances. For example, US$9.7 billion of BHP's first half underlying EBITDA of US$13.9 billion was generated from its iron ore operations.
Whereas for Rio Tinto, iron ore contributed US$20 billion of its US$23.9 billion underlying EBITDA in FY 2023. And of course Fortescue only generates revenue from iron ore at present.
Clearly, the future direction of the iron ore price will have a major impact on how these miners perform.
But where is the steel making ingredient heading in the coming years? Let's take a look at what analysts at Goldman Sachs are forecasting for the base metal.
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Iron ore price forecast through to 2027
According to a note out of the investment bank this week, its analysts expect the benchmark 62% fines iron ore price to average US$111 a tonne in 2024. This is broadly in line with the current spot price of US$109 a tonne, but down from an average of $120 a tonne in 2023.
Further weakness is expected in 2025, with Goldman forecasting an average price of US$95 a tonne for the year. This reflects the broker's belief that global seaborne iron ore demand will increase slightly to 1,573 million tonnes (MT), but for supply to lift 2% to 1,573 MT, leaving supply and demand balanced.
A smaller decline in the iron ore price is expected in 2026, with Goldman forecasting an average price of US$93 a tonne. This is based on the broker's forecast for a small reduction in global demand to 1,560 MT, largely due to weaker demand in China. At the same time, Goldman expects global supply to lift 1% to 1,594 MT. This creates a 34 MT surplus.
Finally, in 2027, the broker is forecasting a further small decline to an average of US$92 a tonne for the iron ore price. This reflects a 2% lift in global seaborne supply to 1,629 MT and smaller 1% lift in demand to 1,580 MT, creating a 49 MT surplus.
In summary, that is:
- 2024: US$111 a tonne
- 2025: US$95 a tonne
- 2026: US$93 a tonne
- 2027: US$92 a tonne
