Goldman’s ‘favorite’ commodity has been on a tear, and could have further to run
Copper prices have experienced a remarkable resurgence since the late March crash, hitting two-year highs last week, and Goldman Sachs believes the rally has further to run.
Often seen as a bellwether for the global economy, copper
prices plunged at the end of March as the coronavirus pandemic spread
throughout the world and sent markets tumbling.
However, the spot price has recovered rapidly from $2.1195 a
pound on the New York Mercantile Exchange on March 23 to $2.9580 a pound on
Friday. It is up 5.87% for the year and 9% for the quarter, initially buoyed by
a sharp pickup in Chinese demand.
“While this contrasts sharply with the c.5% average decline
in share prices for the Big 4 diversified miners (Anglo, BHP, Glencore, RIO), we
remain bullish on the sector on a global economic recovery, led by China,”
Goldman Sachs metals and mining analysts said in a note Friday.
Goldman Executive Director Jack O’Brien and his team
attributed their optimism in part to a recovery in the autos and appliances
sector, ongoing strength in the Chinese property market and the second-highest
single-month credit issuance in China on record. A weaker dollar and rising
global inflation expectations are also expected to support copper prices going
forward.
Copper remains Goldman’s “favorite” commodity on the basis
of cyclical and structural support and ongoing supply issues, with Glencore and
BHP the companies best positioned to benefit from rising copper prices,
according to the bank.
“Recent data points have been supportive, with a tight
demand picture increasingly emerging as persistent on-shore demand in China has
seen LME (London Metals Exchange) inventories fall to the lowest level since
2005 and falling treatment fees signaling a tight concentrate market,” the note
said.
“Our view remains that copper can remain stronger from here
as Chinese property demand remains at elevated levels, and the supply-side
continues to deal with the effects of Covid-19.”
Supply concerns linger
In assessing the supply outlook, Bank of America strategists
noted Friday that copper mine supply had been in decline, while refined supply
has increased. They suggested that this divergence is not sustainable, given
the usual causal link between the two, while a lack of staff on sites raised
the risk of disruptions to mining companies.
“Hence, against the ongoing headwinds to mine production,
there is a risk to the sustainability of global refined production increases of
2.5% in May,” Bank of America said in a research note.
BofA strategists highlighted that baseline mine supply
growth had fallen steadily in recent years, with copper concentrates production
in 2020 hovering at roughly the same levels as in 2016.
“While output should rebound next year, we remain concerned
that unexpected losses may increase as miners especially in Chile have had only
essential staff on site in recent months,” they said.
“Linked to that, we have factored in the usual disruption
allowance of 6% for 2021, which implies a deficit of 188Kt; yet, there is a
risk that the shortages may end up being much bigger.”
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