Goldman Sachs China Metals Consumption Index Pits Metals Bulls vs. Bears

Goldman Sachs Group, love ‘em or hate ‘em, has an enviable reputation for correctly predicting economic trends, be they stock markets, exchange rates or commodities.

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Part of the reason is that they hire some of the brightest and best, and another part is that they have enormous resources at their disposal.

A combination of the two is channeled into top-class research and analysis, so when the bank creates a new index, the markets take notice. A Financial Times commodities note reviews Goldman’s latest creation, the China Metals Consumption Index and reports what it has to say about China’s economy based on 100 components of China’s industrial production data that pertain to commodity consumption.

China’s Far-Off Hard Landing

The index shows the pace of demand growth for metals and other mined commodities has now been slowing for four years. In the second quarter, Chinese demand actually fell for the first time since the financial crisis, the FT says, and as a result Goldman is now forecasting a “hard landing” for metals demand for the first half of this year which has not fully translated into prices yet.

Indeed, a Reuters review of the future direction of metals prices majors on Goldman’s pessimistic view, no doubt driven by their new index. Focusing on copper prices, Goldman’s are even more bearish than we are, if that’s possible.

The bank is slashing its short-, medium- and long-term forecasts by as much as 44% out to 2018. Goldman is expecting the price to fall to $4,500 per metric ton by the end of this year but, and here’s the rub, they are predicting it will stay low through 2017 and 2018, “as the market adjusts to a seven-year bear cycle,” running from 2011 to 2018.

Yet, Bulls Disagree…

Nor is Goldman alone in its bearish view, as Andy Home at ThomsonReuters reports, Bank of America is forecasting $4,969 per mt for next year, while Bloomsbury Mineral Economics is suggesting $4,250-4,250 per mt by the end of next year.

Usually there is some level of consensus among analysts but currently there seems to be more polarization than there has been since the financial crisis. On the contrarian side are leading commodities banks such as Standard Chartered and Citi according to the article, who are still targeting prices above $7,000 per mt next year.

Neither camp can agree on the whether the copper market will be in surplus or deficit next year. The World Bureau of Metal Statistics puts the global copper surplus at 159,000 mt for the January to April period this year, that’s an annualized near-half million mt, a figure close to Goldman’s estimates for every year between now and 2019.

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Demand is contracting, the bank says, and supply is likely to continue to increase in spite of its tendency to consistently disappoint on the supply side in recent years. The bulls, of course, are predicting something entirely different. Casting significant doubt on the ability of new supply to meet its promises, the bulls, such as Citi, are predicting a global surplus of just 94,000 mt this year but deficits of 109,000 mt next year and 143,000 mt in 2017.

The Undiscovered Country

The great unknown, of course, is China. Possibly Goldman’s index is giving them a sense of just how much the Chinese economy is slowing down, regardless of what the official figures are saying. According to the FT, in Goldman Sachs’ estimate China’s growth for full-year 2014 was actually 4.3% year-over-year if calculated from a commodity consumption perspective – historically an accurate measure.

“The implied 4.3% growth rate last year looks more worrying than the official data on the construction sector’s GDP, which reported 8.9% year-over-year growth,” the FT reported.

Our money is on Goldman, demand is picking up a little in the US and Europe, but it is down in Asia and particularly in China, consumer of half the world’s commodities. If Chinese consumption continues to wane then metals prices have little to lift them and Goldman’s view of price direction could well be right.