Goldman Sachs: Copper Prices Will Stay Lower for Longer

There is much debate about how much further copper prices have to fall. The LME Copper price dropped to $4,590 per metric ton on Tuesday and has recovered only slightly since. It is now at its lowest level in six years and, according to ThomsonReuters, some analysts are suggesting it could fall to $4,000 per mt, that is apparently Glencore’s worst-case scenario and the number they are cutting their cloth to live with as part of their ambitious debt reduction program.

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Not all producers are willing to join Glencore and make cuts. Bloomberg reports Codelco is saying it won’t cut copper production as prices slump. Speaking at the Metal Bulletin conference in Shanghai, Codelco’s CEO is quoted by the paper as saying he would rather rein in costs than curb output; noting that “if we suspend production then it’s difficult to restart.”

Goldman Sachs is Still Bearish

Goldman Sachs is quoted as saying the bear cycle in copper has years to run, predicting rising global surpluses through 2019. The growth in China’s demand will slow to 3% a year from 11% in 2013 as the government shifts the focus from investment spending to consumer demand and services as the main driver of the economy.

Although China’s biggest smelter, Jiangxi Copper Co., said supply and demand will be in balance in 2015 and for the next several years, the company was talking only about the local, Chinese market.

China has become a major copper producer in its own right and imports of refined metal have plunged. Chinese investors are said to still be shorting copper, they may well have more of an inside track on domestic copper inventories than western investors.

Still Being Shorted

Short positions on the Comex have also increased over the last week or so from 16,499 to 19,398 contracts. But even those betting prices have bottomed and an upturn is on the way — long positions have also been increasing slightly since July — a strong recovery similar to that seen in 2009 is, even the few remaining bulls would agree, highly unlikely.

Back then, supported by an unprecedented tidal wave of stimulus programs, confidence in China’s capacity to underpin demand supported a contango in the forward price curve. Today, forward prices in the first half of 2016 are trading at a discount, suggesting investors believe prices will be lower next year.

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Miners’ drastic curtailments and cost reduction programs would seem to support Goldman’s position that copper prices have little to support them in the foreseeable future, and lower for longer is the order of the day.

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