The long-term crunch in the copper market could be ‘extreme’, says Goldman Sachs expert.
Goldman Sachs metals strategist Nick Snowdon has doubled down on his comments that copper is the new oil, saying prediction a supply crunch in copper could send the red metal to US$15,000/t could yet prove conservative.
Copper demand is expected to skyrocket over the next decade as growing demand for renewable energy, electricity infrastructure and electric vehicles increases alongside global carbon reduction targets.
But the cupboard is relatively bare when it comes to new supply, with extremely low supplies of metal held in commodity exchange warehouses exacerbating the issue.
While increased supply could hurt battery metals fundamentals over the next two years, according to recent note by Goldman analysts including Snowdon, speaking on a Bloomberg podcast Snowdon reiterated his belief the paradigm shift could send copper to new highs.
“The bull market of the 2000s was nearly entirely solved by supply responses, and then that very rapid increase in mine investment. That’s clearly not going to be the majority solver this time though,” he said.
“So when we say US$15,000, what we’re saying there is copper is going to have to go to a price level well beyond any level we’ve seen before historically to achieve that demand destruction.
“Could US$15,000/t prove conservative? Absolutely.”
Snowdon compared the “extreme set of fundamentals” emerging in the copper market to the oil boom of the 2000s and the current price surge in lithium, another key battery material.
“And the reason why I say that, look at oil in the 2000s,” he said.
“Oil started that decade trading US$10-20 a barrel and ended the decade trading US$140-150 a barrel, so a seven-fold increase in price to adjust the market enough to solve balances that oil faced in 2000 that were very similar to what the copper market faces today.
“We don’t rule out that copper could could be a US$50,000-US$100,000 commodity and there are plenty of commodities that have achieved that.
“Look at lithium, lithium is trading five times above, six times above the cost curve today. This does happen in commodity markets when you face such extreme fundamental imbalances.
“And price has to go to such extremes to solve that.”
Snowdon said it would take a lot to cause demand destruction in copper because it is “such a small part” of the goods in which it is used.
Base metals turn on Chinese lockdown news
The end of China’s lockdown of Shanghai, the heart of its industrial and trading hub has sounded the horns for a run in base metals, with nickel up 3.5% to US$29,279/t overnight and the aforementioned copper up to a three-week high of US$9543/t.
That news, which also saw runs in iron ore and other metals like zinc, was closely followed today by China’s monthly PMIs, indicators of the broad health of the world’s second largest economy.
They surprised to the upside, with the manufacturing PMI rising from a terrible 47.4 in April to 49.6 in May, up on the Bloomberg consensus of 49.0.
That is still a contraction, but there are suggestions there that it will continue to rise as anti-Covid measures are rolled back.
Capital Economics China economist Sheana Yue said the PMIs may have understated the scale of the economic recovery as Shanghai was still in lockdown when the surveys were taken.
“In the near-term, we expect a further recovery in activity amid falling infections and easing restrictions, particularly in Shanghai and Beijing,” she said.
“That said, we doubt a strong rebound is likely given headwinds from external demand and the smaller scale of policy easing compared to 2020. Even without further large-scale lockdowns, we think China’s economy will struggle to return to full health.”
Evy Hambro, head of thematic and sector investing at global investment giant BlackRock and one of the world’s most influential stock pickers is more bullish.
“People need to be ready for what could be a pretty exciting time if that kind of engine kicks back into life,” hetold the AFR in an interview.
“China has a fantastic track record of being able to restart activity as and when the conditions are right, so I have quite a lot of confidence that we will see a demand pull for commodities in the second half of the year if the COVID numbers start to decline.”
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