June 28, 2012


Goldman Sachs cuts base metals price forecasts


The three-month price forecasts for base metals have been lowered by Goldman Sachs analysts, they said in a note on Monday (June 11).


Copper forecasts have been shifted down to US$8,000 per tonne, from US$9,000 per tonne, previous, aluminium to US$2,200 per tonne from US$2,400, nickel to US$17,000 from US$18,600, and zinc US$1,950 from US$2,200.


"Our prior forecasts did not incorporate widespread deleveraging and a significant move to net speculative short positioning on the back of a crisis in confidence in European policy makers to respond to the unfolding banking and sovereign crisis in the region," they said.


"Nor did they embed the associated appreciation in the dollar/euro. While we expect these factors may be partly unwound in the coming months on the back of a cohesive European policy response, there is sufficient risk to this view that we are taking down our forecasts."


Metal consumption excluding China has been weaker than expected this year, they said, but in copper's case, this weakness was in fact offset by stronger Chinese consumption.


"It was also offset by weak mine supply outturns, leaving the market broadly balanced – stocks are drawing globally at present, and have been since April, but this is partly seasonal," the analysts said.


In the case of aluminium, nickel, and zinc, meanwhile, there were fewer non-price related losses than in copper, and as such, prices needed to fall in response to weaker consumption outside China in order to limit output growth or even induce output declines, they added.


Part of the base case at Goldman Sachs is for an improvement in the macroeconomic environment in the second half of this year, leading to generally higher prices.


The analysts have assumed there will be an appropriate policy response in Europe, including support for the banking system, steps towards fiscal union, and Greece staying in the single currency.


They are also expecting some form of further quantitative easing in the US, as well as further cuts in rates in China, alongside easing in property policy and the continued expansion of social housing.


"In our view, the main downside risk to the macroeconomic outlook is for banking and/or sovereign issues to worsen in Europe in the second half," they said.


"Our base case is for solid upside from current three-month prices for aluminium, and copper. We see moderate upside for zinc, and expect nickel will continue to underperform."


Goldman Sachs' six- and 12-month forecasts are unchanged for now, on a "very constructive" base case over this period.


"Overall, our full-year average 2012 metals forecasts are revised down by 4.2-5.6%, with copper now forecast to average US$8,166, from US$8,567, aluminium to average US$2,191, from US$2321, nickel to average US$17,864, from US$18,650, and zinc to average US$2,014, from US$2,104," the analysts said.


Copper mine supply continues to underperform, they added, and treatment charges (TCs) are still very low at US$20-25 per tonne, suggesting a lack of copper mine supply availability in relation to smelting capacity.


The analysts nonetheless expect mine supply to pick up in the second half, although this may be offset by growing demand during the period. Nickel and zinc, on the other hand, are expected to underperform on a three-month basis, and Goldman Sachs analysts remain cautious on their outlook for nickel in particular.


"We have been cautious on the outlook for nickel since the start of the year, and prices are down [about] 10% over the period," they said.


"We remain cautious on the outlook for nickel over the next three months owing to anticipated conventional and low cost nickel pig iron supply growth, and high inventories. Importantly, these inventories are not locked up in 'financing deals' like in aluminium," the analysts added.


In the short term, there could be downward pressure on the nickel cost curve, they said, following the over importing of low grade nickel ore before the potential Indonesian export ban.


In zinc, no significant mine supply cuts have been reported at current prices, according to the analysts, and many low grade, high cost Chinese producers are still making money at these levels.


This is expected to restrict the upside to zinc prices in the short term, pushing down the price target over the next three months.


Into the second half, the positive micro environment is likely to continue for copper, the analysts said.


"Aluminium will tighten at current prices as global supply growth would remain constrained in a growing demand environment, though zinc and nickel are expected to underperform," they said.


They have now opened long aluminium US$2,150 per tonne call position for September 2012 at a cost of US$18.8 per tonne, as aluminium prices move nearer December 2011 lows. Near-dated aluminium implied volumes are also very low by historical standards, they said, and the market is likely to tighten at current prices.