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Iron ore rally short-lived, prices to come off: Goldman Sachs

The rally in iron ore that has seen prices climb from multi-year lows hit in December will likely be short-lived as Chinese demand is unlikely to pick up strongly, according to Goldman Sachs.

Spot prices of the steel-making raw material on The Steel Index rallied 7 percent last week and were at $52.40 a ton on Friday, bringing gains to about 22 percent year-to-date.

Driving the price surge was a steel supply deficit and better margins required to increase production ahead of Chinese peak demand season starting in the second quarter, according to Goldman Sachs.

The jump in prices also come amid a recent tax cut on property transactions in China and an effort to reduce overcapacity in the Chinese steel industry. An unexpected increase in total fundraising by Chinese non-state entities in January also fueled expectations of higher construction activity this year.

Hard data however is not supportive of the price moves.

"We are yet to find evidence of higher-than-expected steel demand – whether in the order books of individual steel producers or in the official data for new orders. Based on the information currently available, the seasonal increase in demand appears only marginally stronger than last year," Goldman Sachs said.

Supply from top iron ore exporters Brazil and Australia has also recovered from weather-related disruptions, further weighing on prices.

Unless there is an unexpected surge in demand, the rally may be hard to sustain.

"Barring a material increase in Chinese steel demand in the coming weeks, we believe steel production will decline in 2016 and seaborne demand has essentially peaked. The stream of announced production cuts is bound to resume, in line with long dated iron ore prices that have remained in the low to mid $30s for 2017 and beyond," Goldman Sachs said.

Goldman Sachs is forecasting 2016 iron ore prices to average $38 a ton, down from its $43 a ton estimate in the first quarter of the year.

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