Copper: Entering the eye of the supply storm – Goldman Sachs

Research Team at Goldman Sachs, notes that the copper prices are broadly flat since the end of last year, despite substantial Chinese credit stimulus, a weaker US dollar, and a substantial rise in copper net speculative positioning.

Key Quotes

“Underperformance has been particularly stark relative to other metals, with zinc +40%, palladium +27%, and nickel +23% over the same period.

Our GS copper mine supply tracker (which covers c.60% of global mine supply), updated for 2Q16 results, indicates that copper price weakness over the YTD has in part reflected solid mine supply growth during 1H16. Indeed, the hedging of surplus mine and refined supply likely acted to offset rising net speculative positioning (LME copper open interest has risen 25% ytd). Solid mine supply growth has reflected the ramp up of new mines and lower-than-normal ‘disruptions’, and has resulted in rising smelter and refinery charges (against seasonal norms).

Further copper cost deflation during 1H16 (despite a weaker US dollar) also likely contributed to copper price underperformance, as evidenced by our new quarterly copper costs tracker, detailed in this report. For the producers in our sample - which represents at least 45% of global mine supply, cash costs declined by c.10% in 1H16 relative to 2H15, to $2,500-$2,650/t. Cash costs are down c.20% 2Q16 vs. 1Q-3Q14.

Looking ahead, company guidance and our estimates suggest that copper is entering the eye of the supply storm, with our GS supply tracker pointing to c.1mt of incremental copper mine supply between 3Q16 and 1Q17, pre-potential disruption. This “wall of supply” is expected to translate in to higher copper smelter and refinery charges and ultimately, higher refined copper production (set against softening demand growth), and as such we re-iterate our well below consensus price forecast of $4,500/t, $4,200/t and $4,000/t on a 3-/6-/12-mo horizon, respectively.”