LONDON (Reuters) - Wall Street heavyweight Goldman Sachs has been banging the bear drum on the copper price since the middle of last year.
Its July 2015 research note was titled “Copper - lower for longer”, which pretty much said it all.
Copper, which was then trading in London around the $5,500-per ton level, would fall to $4,500 by the end of 2016 and then stay there for 2017 and 2018 as “the market adjusts to a seven-year bear cycle” running from 2011 to 2018, the bank argued.
Things have not worked out that way.
“The rally in copper prices over the past two months was in sharp contrast to our more bearish expectations”, it now concedes. (“2017 copper outlook - a more bullish view”, Dec. 11, 2016).
With copper currently trading around $5,770 per ton, Goldman is now calling for prices to rise to $6,200 over the next six months, a major revision from its previous six-month call of $4,800.
It may be a little unfair to single out Goldman Sachs.
The entire market has been wrong-footed by copper’s dramatic change in fortune.
At the time of the January 2016 Reuters poll of analysts, the median price expectation for 2017 was $5,182 with only one participant, Standard Chartered, positing a more bullish outcome ($6,500) than Goldman’s latest forecast.
Then again Goldman is Goldman. And it has a habit of making aggressive market calls, which makes its flip from super-bear to super-bull something of a stand-out.
But its reasoning is also a neat summation of the broader flip in consensus among metals analysts.
Underlying Goldman analyst Max Layton’s change of mind about copper’s prospects next year is a reassessment of the market’s supply-demand dynamics.
Layton is now forecasting a small supply deficit of around 180,000 tonnes in 2017, compared with a previous expectation that the market would be in a moderate surplus of around 360,000 tonnes.
The major part of that more bullish view derives from a recalculation of expected mine supply.
Goldman is now expecting mine supply to decline by 0.4 percent next year compared with a previous forecast for 1.0-percent growth.
It is not alone in rethinking the timing and nature of the much-feared “wall of copper” supply surge.
The International Copper Study Group (ICSG) made some major revisions to its forecasts back in October.
Compared with its previous forecast in March, the ICSG lifted its assessment of mine supply growth this year to 4.0 percent from 1.5 percent but downgraded its 2017 forecast from 2.3 percent to zero.
The “wall of copper”, it seems, arrived earlier than expected, in part due to efficient ramp-up of new mines and in part due to a low level of disruption in the first half of this year.
Next year, by contrast, there are fewer new mines due to come onstream, while, as Goldman notes, the list of potential disruptions from expiring labor contracts, Zambian power and tax issues and Indonesian export permit problems looks set to grow.
On the demand side, meanwhile, Goldman has lifted its usage growth expectation from 1.7 percent to 2.2 percent.
“Over a very short period of six weeks we have seen data releases pointing to a surge in global industrial activity, most notably in China where the manufacturing (purchasing managers index) jumped to its equal highest level in four years.”
The election of Donald Trump brings with it the promise of infrastructure spend and reflation in the United States, but the real driver of stronger-than-expected demand for copper and other industrial metals this year has been China.
The metal markets started the year fearing a hard landing for metals-intensive sectors of the Chinese economy but underestimated Beijing’s willingness to pump up its flagging growth rate using the tried-and-tested channel of infrastructure spending.
Fixed asset investment has rebounded, the residential property sector is once again bubbling, in the major Chinese cities at least, and so too are the prices of just about every industrial commodity from steel to copper to zinc.
The tail winds of China’s own flip-flop on economic policy are still blowing and can be expected to continue doing so through the early part of 2017.
At which stage we get to see in more detail what exactly the Trump administration’s own version of fiscal stimulus looks like.
The gorilla in the metals room right now is the elevated level of speculative interest roiling Chinese commodity markets.
Make no mistake. Western investors too were starting to reassess metals pricing in light of shifting supply-demand drivers.
But the scale and speed of the recent price increases has largely reflected massive allocations of money by Chinese players.
To be fair to Goldman, its new copper forecasts are predicated on a reevaluation of fundamental drivers rather than the “tempting” option of blaming “this surge in speculative interest”.
But it is surely right to highlight the risks to any current forecast from “the timing and scale of shifts in net speculative positioning and Chinese asset allocation”.
The sheer potential scale of Chinese investment appetite “dwarfs the size of the copper market.”
The bank estimates that as much as $600 billion of funds may be seeking a new home after being chased out of property and stock markets by the Chinese authorities.
“Were just 2.5 percent of these funds to shift into copper, net speculative length would double from its current level of around $15 billion.”
And if it did, even Goldman’s above-consensus bull copper call might turn out to be super-conservative.
Layton is not the only analyst trying to factor in this new metallic gorilla.
Nor is he the only one reassessing copper’s ever-changeable supply-demand dynamics.
Goldman has dramatically changed its stance. Others will surely follow.
Editing by David Evans