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Goldman’s ‘favorite’ commodity has been on a tear, and could have further to run

Trucks at work in the copper mine ‘La Escondida’ in Chile

Jorge Mu-Oz | AFP | Getty Images

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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