Coal, iron ore could fall more in next few months: Goldman Sachs

SINGAPORE (Reuters) - The risk of prices for commodities such as coal and iron ore falling will grow in the last few months of the year, Goldman Sachs (GS.N) said on Thursday, with waning confidence in China's economy encouraging traders there to offload chunks of their stocks.

Julian Zhu, China commodities analyst with Goldman Sachs, also warned at a press briefing that the seasonal fourth quarter pick up would be insufficient to pull commodities out of their rut.

The price of iron ore .IO62-CNI=SI has fallen 36 percent since early July and coal has dropped by a quarter from this year's peak, with demand hit by the slowdown in China, the world's top buyer of both raw materials.

"We see high production, high inventory and demand growth that is still below trend," Zhu said. "So we should see further downside risk to commodities in the next quarter."

Zhu said Chinese steel, iron ore and coal traders are becoming increasingly pessimistic about China's economic outlook for the next 12 months and as a result are selling their stockpiles, which has led to inventory build up at producers.

Steel mills are also selling from their stocks of raw materials and finished products, which Zhu said was behind the recent fall in coking coal and iron ore prices.

The market outlook steel and aluminum, already facing a supply glut, is likely to stay subdued over the next few quarters, Zhu said, with local governments subsidizing new producers as they look to boost employment.

"China will continue to over produce, despite the talk of it cutting production of steel ... it is not happening."

Goldman forecasts China's total aluminum capacity rising to 38 million tonnes this year and 45 million tonnes at the end of 2013, from 30 million tonnes in 2011.

COPPER STILL STANDOUT

Copper remains a top pick in the commodity sector because without access to its own large scale deposits, China will need to maintain imports to service its urbanisation, supporting demand growth in the high single digits over the next 3-5 years, Zhu said.

But in the near term, prices could face headwinds from swollen inventories. Stockpiles of copper held in customs cleared zones, at producers and trading houses, and kept in state reserves sits at 1.5-1.8 million tonnes, Zhu said, equivalent to around 23 percent of last year's consumption of 8 million tonnes.

"The market has overestimated China copper demand strength, and underestimated inventory. Shanghai bonded stock as of the end of August is still above 600,000 tonnes - this is a very big number."

(Reporting by Melanie Burton; Editing by Joseph Radford)