Goldman Sachs forecasts copper to rise from US$4.65 a pound to a...

Goldman Sachs forecasts copper to rise from US$4.65 a pound to a new all-time high of US$5.50/lb over the next 12-months.

Copper market:

Multiple factors on both sides of the copper business are at work in the price, including:An ongoing production deficit, which industry research body Lisbon-based International Copper Study Group (ICSG) said totalled 475,000 tonnes last year – a modest improvement on the supply shortfall of 484,000t in 2020.On the other side of the business, there is a strong recovery in Chinese copper demand.Investment bank Citi estimated this drove a 4.4% rise in the first two months of the year – the highest year-on-year growth increase since last June.

BHP is considering a US$10 billion investment to expand its Chilean copper business but only with “legal certainty”, the head of the company’s copper division, Ragnar Udd, told the CRU-CESCO copper conference.Chile’s new Mines Minister, Marcelo Hernando, promised at the conference that the country will not lose its competitiveness, even as plans to possibly nationalise copper and lithium remain on the agenda of a recently elected left-leaning government.

Meanwhile, uncertainty remains about the future supply of Russian copper as Ukraine war sanctions start to bite.Among the Russian projects which could face delays are the US$7 billion Udokan mine in the far east of Siberia and the US$8.5 billion Baimskaya project in the even more remote Chukotka region, which is 3,000km from the nearest railway.

Long-term market changes:

Some analysts see the potential for a copper price correction, especially as the current high price might be leading to some demand destruction and substitution.However, that might not be the case, because copper is an essential metal and substitutes in some applications, such as aluminium, are also close to all-time price peaks.Wood Mackenzie, a leading research house, is concerned that the overall increase in metal prices could lead to long-term changes in the market.Robin Griffin, vice president of Wood Mackenzie said mining company profit margins are “way above historic norms” and such a drastic divergence of price and production costs cannot last indefinitely, even if there is an indefinite “stranding” of Russian supply.

But Griffin’s concern about high prices destroying demand are not being reflected in the underlying supply-and-demand fundamentals as shown in the latest ICSG reports and sliding stockpiles on terminal markets such as the London and Shanghai metal exchanges.The London Metal Exchange copper stockpile has dropped from 250,000t to 80,000t over the last seven months, prompting investment bank Goldman Sachs to warn that the loss of Russian copper from the market could be a significant development.Goldman Sachs believes investors are “mispricing Russian supply risk” with a million tonnes of Russian copper potential missing in action.The bank expects copper to rise from its current already elevated US$4.65 a pound to a new all-time high of US$5.50/lb over the next 12-months.It’s forecasts like this, which appear to justify a number of recent, and very high-priced copper deals, including the $1.5 billion acquisition of the CSA copper mine in NSW by the special purpose business, Metals Acquisition Corp.

Electric vehicles accelerating copper demand:

Citi’s latest copper analysis via its China Copper End-Use Tracker found that demand was especially strong in the automotive (electric vehicles), industrial and transport sectors.The importance of EVs in the copper market has been well reported over the past few years because they use much more copper than internal combustion vehicles, with Citi’s copper tracker fleshing out the theory by calculating that copper demand in the automotive sector rose by 20% in the first two months of the year.But Citi also warned that China’s copper appetite could decline over the next few months as the latest Covid-19 outbreak forces the lockdown of major population centres, including Shanghai.