Supply, Demand and the Forward Market Conditions for Copper.
Goldman Sachs November 2020
Goldman Sachs November 2020
“Copper rallied on Tuesday to a seven-year peak after strong economic data from Asia as Goldman Sachs (November, 2020) said the world’s most important industrial metal was in the first leg of a bull market that could carry prices to record highs.
Benchmark copper prices on the London Metal Exchange hit $7,719 a tonne in afternoon trading, the highest level since March 2013, after readings on manufacturing activity in China and South Korea surpassed market expectations.
Copper is used in almost all construction projects and major appliances. The metal has risen 25 per cent this year, boosted by supply disruptions, hopes for a wave of “green” economic stimulus and China’s rapid recovery from the pandemic.
China, the world’s second-biggest economy, has imported a record amount of refined copper this year due to voracious commercial demand and government stockpiling.
“This current price strength is not an irrational aberration, rather we view it as the first leg of a structural bull market in copper,” said Nicholas Snowdon, analyst at Goldman Sachs.
A weaker US dollar, which makes commodities cheaper for holders of other currencies, and optimism that a vaccine will sharply slow the spread of coronavirus has lent further support. Copper slumped to $4,600 at the height of the Covid-19 crisis in March.
Its breathtaking rally has put a rocket under the share prices of major copper producers. Mr Snowdon said the 23m-tonne-a-year refined copper market was facing its tightest conditions in a decade, with demand projected to exceed supply by 327,000 tonnes next year, followed by 153,000 tonnes in 2022.
Against a backdrop of low inventories and net zero carbon pledges from countries including China, Japan and South Korea, Mr Snowdon believes significantly higher copper prices will be needed to incentivise new supply and balance the market.
“We believe it highly probable that by the second half of 2022, copper will test the existing record highs set in 2011 [$10,162],” he said. “Higher prices should ultimately help defer peak supply and ease market tightness, but this first requires a sustained rally through 2021-22.”
For an increasing number of investors copper is emerging as one of the best ways to gain exposure to a rollout of more wind, solar, batteries and electric cars, owing to the metal’s use in electric wiring.
On average, an electric car contains more than three times as much copper as an internal combustion car. Copper is also used in wind turbines and to connect renewable sources of generation to the grid.
In a recent report, investment bank Jefferies estimated cumulative copper demand from wind, solar and EV’s over the next 10 years could equal more than half of global demand in 2020 even in a “bear” case scenario.
At the same time, large high-grade copper deposits in mining-friendly jurisdictions are becoming more difficult to find. According to S&P Global Markets there has been only one major copper discovery since 2015. New copper projects also take at least seven to 10 years to develop.
Jefferies analyst Christopher LaFemina said: “The bottom line is that the mechanism to balance the copper market over the next five-plus years will need to be a higher price leading to substitution, demand destruction and more scrap supply as an adequate mine supply response will take too long to materialise.”
January 5th , 2021
Goldman proclaims the dawn of a new commodity supercycle by Andy Home
LONDON (Reuters) -Will COVID-19 kick-start a new commodities supercycle? Goldman Sachs thinks so.
While last year’s strong rebound in many commodity prices might be viewed as a “V-shaped vaccine recovery”, the bank contends it is just “the beginning of a much longer structural bull market for commodities”.
“Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play,” Goldman argues. (“2021 Commodities Outlook: REVing up a structural bull market”, Nov. 18, 2020)
The 2000s were transformative for metal prices, which experienced a tectonic demand boost from industrialisation and urbanisation in emerging nations, China in particular.
Copper, the bellwether of the industrial metals sector, rose from under $2,000 per tonne in 2000 to a record high of $10,190 in February 2011.
But the supercycle hype dissipated over the course of a four-year bear market which only troughed late in 2015, leaving many investors disillusioned with the sector.
No-one has talked much about a commodities supercycle since then, which makes Goldman’s call all the more remarkable.
So what’s a supercycle, why was the last one so short-lived and what makes one of Wall Street’s finest think another one is coming?
SUPER BOOM AND BUST
A supercycle can be defined as “decades-long, above-trend movements in a wide range of base material prices” deriving from a structural change in demand. (“Super-cycles of commodity prices since the mid-nineteenth century”, United Nations DESA Working Paper, 2012)
The industrialisation of the United States in the late 19th century and post-war reconstruction in Europe and Japan in the 1950s are two prime examples.
The 2000s supercycle initially conformed to the same pattern, this time in the BRIC countries – Brazil, Russia, India and China.
But the Global Financial Crisis blew the super off the cycle with only China doubling down on its infrastructure and construction sectors. Everyone else was fighting financial fires and propping up banks doesn’t do much for commodities demand.
By the middle of the decade even China had run out of momentum as policy makers moved to mop up the excess liquidity from the 2009-2011 stimulus splurge.
The commodities boom of the 2000s turned into bust. The S&P/Goldman Sachs Commodity Index (GCSI) fell 60% over the last decade, erasing three decades of gains.
Look no further to understand why funds who joined the supercycle stampede in 2010 and 2011 have given the commodities sector a wide berth ever since.
It’s also why no-one’s used the word in many years.
Goldman’s supercycle view is predicated on how the world will recover from the COVID-19 crisis with an emphasis on a green industrial revolution and a policy focus on social need.
With China recently committing to carbon neutrality by 2060 and Joe Biden promising to return the United States to the Paris Agreement on climate change, the decarbonisation push is becoming both global and synchronised.
Going green, Goldman Sachs contends, “has the potential to create a capex cycle on par with the emerging markets-driven cycle of the 2000s”.
Not only will this directly impact demand for metals such as copper, but it will have a multiplier effect on labour markets and commodity-producing countries.
Meanwhile, the emerging policy consensus around recovery is that what has been a social rather than a financial crisis will need a social fix.
“Policymakers around the world have signalled that full employment, and increased income for low-income households is a key part of post-COVID policy,” Goldman says.
Such redistribution policies are commodities-positive since lower-income households tend to spend more of the extra money they receive.
Financial stimulus after the last crisis benefited primarily higher-income groups where the marginal propensity to consume out of wealth is a meagre 3%, the bank estimates. Richer people simply don’t need to spend the extra money on more things, while poorer households will consume just about all of it.
Rising wages, meanwhile, would also lead to faster home formation, which is commodities-intensive in the form of construction and household appliances.
Indeed, Goldman’s view is that increasingly synchronised social policies in the wake of the pandemic are similar to those of the 1960s, which saw the United States launch its “War on Poverty” campaign.
“We believe a better analogue to the current environment is the super cycle of the 1970s rather than the 2000s,” it adds.
A kind of super supercycle, as it were, with industrial capital expenditure running at 2000 levels and social rebuilding generating a 1970s style consumer boom.
DIDN’T SEE IT COMING?
The other core plank of Goldman’s supercycle thesis is the lack of supply ready to meet any structural shift in demand.
Capital expenditure in the commodity complex was already low before COVID-19. It has plummeted further in recent months as producers prioritised maintaining existing operations.
China, meanwhile, has been soaking up the rest of the world’s surplus stocks of metals such as copper, aluminium and iron ore.
Goldman is particularly bullish on copper with a 12-month target of $9,500 per tonne even after its turbo-charged rally from the March 2020 lows of $4,371 to a current $7,935.
But copper is only one part of a broader call for a 30% return on commodities this year.
Goldman’s views are by no means consensus.
Many metal analysts are looking for price weakness this year as Chinese growth moderates after a stellar COVID-19 recovery in 2020 and the rest of the world struggles to catch up.
But that’s the thing with supercycles. They look obvious with hindsight but are far harder to see at the time.
Speaking in 2016, former head of BHP Billiton Andrew Mackenzie conceded that the world’s miners didn’t see the 2000s supercycle coming. “Many (including BHP Billiton) were unprepared for what has been the greatest commodities boom of our time.”
Are we about to experience a new one? Has it already started? The jury is very much out and, this being a multi-year supercycle we’re talking about, it could be out for some time.
But one thing’s for sure. Thanks to Goldman Sachs, the commodity supercycle is very much back in the news.
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The arrival of Caerus Mineral Resources on the Standard segment of the LSE, is evidence of a renewed interest in the copper deposits of Cyprus due to a combination of supply shortfall created by the electric vehicle revolution, higher copper prices, a shortage of new production capacity and improvements in mining technology.
The island of Cyprus is so closely associated with copper, that the name “copper” is actually derived from the Greek name for the island, Kupros. Cypriots first used copper to make tools around 4000 BC. Through the Roman Era Cyprus was the main supplier of copper to the world. After the fall of the Roman Empire, there was a hiatus in copper mining activity until the 1800s, when chalcopyrite was mined, until the confrontation between Greek and Turkish Cypriot military forces in 1974 when the mines of the main producer were closed due to being divided by the cease-fire demarcation line across the island.
Now, the arrival of Caerus Mineral Resources shows renewed interest in the country’s copper deposits exploiting the stable EU status of ‘Greek’ Cyprus today. Caerus has 14 advanced brownfield exploration properties that also encompass remnant ore deposits and cover 32km2 in the former prolific mining districts of Kalavasos, Kambia, and Vrechia. The profiles of the Board of Directors and their mission statement suggest a junior company with ambition : ‘low-cost, de-risked redevelopment of former copper-gold mines hosting significant residual mineralisation, strike extensions and new targets underpinned by low-technology reprocessing of oxide ores and dumps for early cash flow to fund future growth.
The company strategy revolves around identifying multiple sources of ore to provide scope for incremental growth but also to de-risk their drilling and exploration programmes by focusing on brown field sites with historic mines. In the short term, Caerus is focused on a rapid and low-cost generation of JORC (2012) compliant mineral resources and a parallel feasibility study to verify (acid) leach pad recovery of residual copper from tailings and marginal ore stockpiles.
Caerus is not just another high-risk ‘greenfield’ exploration company but a new entrant determined to be different. It aims to pursue near-term cashflow opportunities in parallel with the more conventional targeting of substantial copper-gold orebodies for long-term growth. Shareholders will be hoping that they can marry the sentimental past linkage between Cyprus and copper with a new future for the mining sector of this ‘island jewel of the Mediterranean’.
Apart from the established and diverse uses for copper in society, the metal is one of the fundamental building blocks behind the new electric vehicle transport and energy storage revolution that is upon us. Driven by widespread consumer adoption, car makers estimate that electric vehicles in use globally will reach between 40 million and 70 million by 2025. Electric vehicles use more copper than cars fitted with internal combustion engines as it is needed in the lithium-ion batteries that power the vehicles, as well as their motors, inverters and charging points. Up to 23 kg of copper is required by each combustion engine car, whereas a hybrid electric vehicle uses nearly 40 kg, and a plug-in hybrid electric vehicle 60 kg. Depending on the size of battery, an electric bus can use between 224 kg and 369 kg of copper.
Nonetheless, there are challenging macro-economic issues ahead for copper production, amidst the electric transport revolution. Demand for the metals is on the rise as more auto makers launch electric vehicles and focus on efforts to extend the cars’ driving range between charges. Building a network of vehicle-charging stations is further increasing demand.
However, the production of electric vehicles is likely to be slowed by supply constraints (Moody’s Investors Service (May, 2020).). “Declining ore grades for copper, continued lack of investment in new mines, and the time required to bring new discoveries to production will constrain metal availability and, ultimately, the metal sector’s ability to meet growing demand from battery/auto makers, particularly in the near-term” it said. Goldman Sachs (September, 2020) have a similar view: “Next year, we expect the largest refined copper market deficit (412kt) in over 15 years due to current positive demand trends. As a result, we have recently raised our copper price forecasts to $7,000/7,250/7,500/t on a 3/6/12m basis”
Currently, small deficits in refined copper and nickel are expected to increase and 1.7M-5M tonnes of extra copper will be needed annually by 2025. This substantial increase in copper demand will be a major challenge that cannot be met by simply cranking-up production from the world’s largest copper mines, some of which are more than 100 years old. Moreover, it is getting more difficult and expensive to find new deposits in politically stable jurisdictions and the time involved between a greenfield investment decision and receiving necessary permits to reaching initial production for a new copper mine is commonly 5–10 years, if not longer.
The dynamics of matching the supply and demand of copper are changing in the light of the transport and clean energy revolutions.
Source: Moody’s Investors Service (May, 2020) “Source Metals shortfall to crimp electric-car battery supply”. https://www.marketwatch.com/story/metals-shortfall-to-crimp-electric-car-battery-supply-moodys-says-2018-05-01. First published May, 2018, again in May, 2020 Claudia Assis, Moody’s
Source: Goldman Sachs (September, 2020) “Goldman’s ‘favorite’ commodity has been on a tear, and could have further to run” https://www.cnbc.com/2020/09/07/goldmans-favorite-commodity-has-been-on-a-tear-could-have-further-to-run.html. September, 2020, Elliot Smith, CNBC
April 23, 2020. 3.39pm
Source: Steve Ward, News Editor, Bullion-by-Post.
Gold broke the all-time Sterling record today as investors continue to clamour for the safe haven metal, and there could be further gains to come according to many analysts.
The second largest banking institution in the United States, the Bank of America Corporation, speculates the gold price could reach $3,000 per troy ounce in the next 18 months. The Bank of America, which also operates Merrill Lynch for wealth management and financial services, published a 15-page report into the economic effects of the coronavirus. A report that reiterated the need for gold in diverse portfolio.
Turbulent markets have seen gold prices rise this week as the true economic impact of Covid-19 became clearer. It is likely that governments will need to spend more and more money to bolster their national economies through the crisis.
In the US, the House of Representatives is ready to pass the latest coronavirus aid bill on Thursday. It paves the way for nearly $500bn more in economic relief amid the pandemic. The EU is also expected to pass a new €540bn fiscal package today, following some tense negotiations between richer and poorer members.
In the UK, the Debt Management Office said it plans to issue £180bn of government debt between May and July. This is more than it had previously planned for the entire financial year.
To pay for all this spending central banks will likely be forced to print money. More money inevitably means inflation. In a world awash with currency, including US Dollars, the total amount of world gold will remain constant, and this explains the Bank of America’s report, aptly titled “The Fed can’t print gold”.
Current gold price charts give further credence to the Bank’s speculation. Today the gold price hit a new all-time high in Sterling of £1,405.32. This also marked a new high in Euros of €1,607.71. In US dollars gold hit $1,735.91 moving it closer to the all-time Dollar high set back in 2011.
Gold has a history of holding its value in the worst of times. Fearing the prospect of recession and inflation, it is little wonder investors have turned to the precious metal safe haven to protect their wealth.
During the financial crisis of 2008, it took three years for gold to reach its peak in 2011, and analysts fear the coming downturn as a result of Covid-19 will be far worse. Jan Vlieghe, a member of the Bank of England’s interest-rate setting committee, gave this stark warning in a speech today:
‘Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.’
It is the fear of this crisis that has many analysts forecasting gold prices climbing far beyond the $2,000 per ounce mark, and the Bank of America’s forecast of $3,000 per ounce is considered to be feasible considering the soaring demand of recent weeks.
The unprecedented global situation makes forecasting as difficult as ever but considering gold more than doubled its value during the last financial crisis, then even matching that performance would certainly see gold hit the $3,000 per ounce mark. The stage is certainly set for a new bull run for gold unseen for a decade.