Copper – lower for longer

The bearish 3D’s of ‘macro’ combine with bearish copper ‘micro’

Substantially downgrading our medium to long-term forecasts
Though we have been bearish on copper on a 12-mo forward basis for the past two and a half years, we have maintained a more bullish medium to long-term stance on the assumption of Chinese copper demand growth of 4% per annum and a major slowing in supply growth around 2017/2018. In this piece we substantially lower our short, medium, and long-term copper price forecasts, on the back of lower Chinese copper demand growth forecasts (we have been highlighting that the risk has been skewed to the downside for some time), increased conviction in copper supply growth over the next three years, and less conservative assumptions regarding mining cost deflation in dollar terms.
We now forecast 3/6/12-mo prices of $5,200/t, $4,800/t, $4,800/t, and we target $4,500/t by the end of 2016, 20% below spot prices and more than 30% below consensus. Our new 2017 and 2018 price forecasts are $4,500/t (from $7,000/t and $8,000/t respectively), with the price eventually forecast to rise back above marginal cost by 2020, to $5,500/t, as the market adjusts to a 7-year bear market cycle (2011-2018). Our new long-term forecast, from 2021, is $5,000/t in $2015 terms (from $6,000/t).
We see the risks to these forecasts as skewed to the downside during October-March 2015/16 and 2016/17 – periods associated with seasonal ‘visible’ inventory builds.

The 3D’s of macro combine with bearish copper ‘micro’
Specifically, we see the 3D’s of ‘macro’ – Divergence, Deflation, and Deleveraging – as the key bearish macro drivers placing substantial downward pressure on Chinese demand growth and global production costs over the medium to long term. Combined with a bearish outlook for the copper ‘micro’ – a high conviction forecast in an acceleration of mine supply growth over the next 6-18 months and copper’s high exposure to weakness in late China property cycle construction completions – it is, in our view, highly likely that the 4-year trend decline in copper prices is set to continue through at least 2018.
As such, we strongly recommend producers increase the hedging of their copper exposure, and investors either reduce long exposure or take out long-dated short exposures in copper.

Max Layton, Yubin Fu, Jeffrey Currie – Commodities Research – Goldman Sachs International