Goldman adds fuel to raging bear-bull copper fire

London

GOLDMAN Sachs has inflamed further an already heated argument between analysts over the outlook for the copper market. The Wall Street heavyweight has positioned itself as a super bear, slashing its short, medium and long-term forecasts by as much as 44 per cent in the case of 2018.

Cash copper, currently trading around US$5,200 per tonne, will fall to US$4,500 by the end of next year, according to Goldman. And, critically, it will stay at that historically low level for 2017 and 2018 as "the market adjusts to a seven-year bear cycle" running from 2011 to 2018.

Goldman is Goldman, which means that everyone sits up and pays attention when it makes such a big call on any commodity market. But it's not alone. There are other super bears out there. And super bulls.

One of the key takeaways from last week's Reuters poll of base metal analysts was the polarisation of views about how copper will perform next year. And beyond.

Goldman has taken a consistently bearish view of copper over the last year or so. In the Reuters January poll of analysts, its forecasts for average prices of US$5,542 in 2015 and US$5,825 in 2016 made it the bear outlier of 34 and 29 analysts respectively. Its new forecast for 2015 is little changed at US$5,670 but it has taken the red ink out for 2016 with a forecast of US$4,725.

The timing of Goldman's latest downgrade meant it didn't make it into the most recent Reuters poll but it is no longer the lone super bear out there. Bank of America is not far behind with a 2016 forecast of US$4,969, representing the lowest price outlook of the 23 participating analysts.

Bloomsbury Minerals Economics, another research house that didn't make it into the July poll, is even more bearish than Goldman. It expects prices to be below US$5,000 at the start of 2016 and to fall to US$4,250-4,500 by the end of the year. "Whilst we are not formally forecasting prices in 2017, our initial view is that they will be lower, perhaps US$4,250," it said.

Underpinning Goldman's bear view, for instance, is a negative outlook on demand from China, previously the driver of global copper usage growth. That the Chinese growth story is losing momentum is no longer in doubt. The bursting of the country's property bubble and the easing of credit growth are well flagged.

But Goldman argues that the official figures on key industrial metrics such as fixed asset investment, already pretty negative, are still overstating the extent of the downturn.

Things may improve a bit in the second half of the year but, according to Goldman, a major deleveraging cycle has only just begun in China.

Copper supply, meanwhile, is expected to maintain robust growth, even making allowance for unforeseen disruptions. Goldman said it is expecting the global refined copper market to notch up a supply-usage surplus of over 500,000 tonnes every year through 2019. Bloomsbury's surplus numbers are lower but it too makes the case for persistent surplus this year and next and beyond.

What they also agree on is the likely lack of supply response at current price levels due to cost deflation (Goldman) and a fractured, disparate production base (Bloomsbury). Or as Bloomsbury puts it, "only prolonged price weakness (which we think is coming) will work to curtail over-supply".

Bulls are having none of it. While everyone has lowered their forecasts for 2016 prices since the January poll, other banking heavyweights such as Standard Chartered and Citi are still targeting average prices above US$7,000 next year. Standard was the most bullish of the 23 participating analysts in the July poll with an average forecast of US$7,250 with Citi just behind at US$7,100.

Bulls would take issue with just about every component of Goldman's bear case. When it comes to China, for example, the two sides argue over what exactly drives copper demand and the importance of non-cyclical factors such as investment in power grid infrastructure.

There has been public skirmishing even at the micro level of whether copper or aluminium stands to benefit most from the current grid spending programme.

Bulls also maintain that bears are overstating the scale of new supply and, more importantly, how efficiently that supply can be expected to come on stream.

The bull case is predicated on copper reverting to supply deficit after 2015. Citi, for example, is forecasting a global surplus of just 94,000 tonnes this year but deficits of 109,000 tonnes and 143,000 tonnes in 2016 and 2017 respectively.

Confused? Well, if you are, it's understandable given the widening divergence in views among some of the biggest banking commodity players.

And that's really the point.

Although arguments over the supply-demand balance in the copper market are nothing new, the split in views between bulls and bears has as often as not amounted to no more than a couple of hundred thousand tonnes. Which is within the margin of statistical error in a near 23 million tonne global market.

What's happening now is something else, amounting to completely polarised forecasts based on completely different outlooks of both supply and demand over the coming years. There is, in other words, no longer any consensus.

And, thanks at least in part to Goldman's latest contribution, the battle of ideas seems set to continue raging. REUTERS