Since October 2020, Goldman Sachs has been singing the price of copper. The core logic is that copper supply is tightening, the continued growth of the global economy and the transformation of green energy stimulates rapid growth in demand.
However, since the third quarter of 2021, copper prices have increasingly deviated from the bank's expectations, and are currently 40% lower than the forecast in March this year ($12,000 per ton).
Since mid-April, copper prices have fallen by 30%, especially in the past month, which has accelerated, reflecting the increasingly pessimistic market expectations for global economic growth. How much can copper prices fall after the sharp drop in
? Goldman Sachs believes that after experienced a rapid collapse in the second quarter, copper prices will further lower this quarter, and lowered the copper target price in the second half of this year from the previous $8,875 to $7,200.
However, Goldman Sachs also believes that the structural bull market for copper is still there, and copper prices will gradually recover in the first half of next year. The bank's latest price target for copper is that will be US$6700/7600/9000/ton in the next March/6/December (previously US$8650/10500/12000/ton).
copper price prediction errors, Goldman Sachs "blame" the appreciation of the US dollar and the demand for hedging soared
Goldman Sachs said in a report last Monday (July 11) that from the perspective of supply, copper inventory currently does not show an overturn point, and the rapid decline in copper prices is more affected by the macro-financial level:
"Because price fluctuations are larger and longer-lasting than fundamentals show, we believe that the recent decline in copper prices is mainly due to macro-funded flows, the most significant feature of which is the rapid appreciation of the US dollar, and we initially expected the US dollar to remain stable and the macro environment will continue to maintain a risk appetite.
As carbon-based commodities (food and fuel) supply is tight, the global growth prospects deteriorate, resulting in risk aversion behavior forces copper to be repriced more severe than other commodities. The variable cost of copper supply is higher than energy, which also intensifies this situation and strengthens the deflation effect of foreign exchange weakness in non-US countries on the value denominated in US dollars."
The bank also stated:
"If the US dollar trend is as we expected, under the same conditions, we expect copper prices to be 33% higher than today's level, close to our initial forecast."
pessimistic forecast, copper prices may fall to $5,750/ton in the next few months under the pessimistic forecast of
Goldman Sachs said in the report:
"The market's pessimistic expectations of demand may continue into the second half of the year, and is largely due to the main driver of energy risk, which is likely to escalate further this winter. Copper prices will obviously continue to be affected by the US dollar , which may still be an unfavorable factor before the macro factors affecting the trend of the US dollar index will be adjusted." The rise in recession risk is a key catalyst for the decline of copper prices, but Goldman Sachs believes that the rate of copper prices falling in depends on the extent of investors' position adjustment.
Goldman Sachs expects that investors' net short positions are only 10,000 lots away from the record net short positions set by COMEX copper futures in August 2019. If the net short position in August 2019 is the potential maximum incremental adjustment, then based on the recent relationship, it will be equivalent to an additional $300-400/ton decline in copper prices.
In addition to the current pessimism of demand, a key micro resistance faced by copper prices is that copper supply is expected to accelerate in the next 18 months:
"In terms of mine supply, the sharp increase in cost investment in the industry in the past two years means that at the copper price of $7,500 per ton, nearly 3 million tons of mine supply is currently in a loss state. In the same situation a year ago, copper prices need $6,270/ton. However, the upward movement of break-even prices does not mean that supply is immediately reduced. Historically, this situation will take at least 1-2 quarters to occur."
According to the pessimistic scenario forecast of Goldman Sachs, in the context of a global economic recession, copper prices may fall to $5,750/ton in the next few months.
Structural bull market is still there, and copper prices will reach US$14,000/ton in 2024
Goldman Sachs said that if its basic view is correct, then at present, the logic for the continued decline of copper prices is limited.
1. Investors have established near record net short positions, and most of the position adjustments based on recession concerns in this round of sell-off have been completed. If the macroeconomic deterioration is not confirmed in the coming months, it will make the price vulnerable to the upward impact of the short cover rebound in outbreak.
2. Goldman Sachs estimates that if copper prices maintain current levels over the next 18 months, this will lead to a 97,000 tons reduction in scrap copper supply for the rest of the year and a 124,000 tons reduction by 2023. This alone can offset nearly half of the supply surplus during the global recession. If the price of falls further, the scrap price adjustment may be even greater. For example, the plummeting copper price during the period 2008-2009 caused scrap steel supply to decrease by 2.2 million tons from the 2007 level.
3. Although Europe has a higher risk of recession than other regions due to soaring energy prices, Goldman Sachs believes that the spillover effect of financial tightening will only moderately affect demand in other regions in 2023, and believes that green demand and power grid construction will increasingly help copper demand recover.
4. Goldman Sachs believes that does not consider the recent fundamental trend, and there is indeed a clear structural bull market for copper . It is expected that copper ore supply will peak in 2024, and there will be record-breaking copper supply shortages starting in 2025, while inventory is still close to the historical lowest level; the current sell-off will further reduce investment on the supply side; this shortage will start from mid-2023 and have an increasingly greater impact. This is also the reason why the bank maintains optimistic forecasts for copper prices in 2024 (US$14,000/ton) and 2025 (US$15,000/ton). How much can copper prices fall after the sharp drop in
?
This article comes from Wall Street News, welcome to download the APP to view more
