Copper: High prices, high demand expectations – Goldman Sachs

Research Team at Goldman Sachs, suggests that with the copper price disconnecting from marginal cost, the market appears to be pricing a move to a deficit during late 2016 and 2017, and/or material copper mining cost inflation (around 15% from the 90%ile of 2016).

Key Quotes

“Indeed, using our supply and demand balance and margins model framework, at current pricing of $5,600/t, the copper market appears to be pricing as much as c.6% global copper demand growth in 2017 – more than double trend global demand growth of 2.5%, and no cost deflation in 2017 relative to 2016, assuming our supply growth path.”

“We do not believe that this is likely and therefore view the extent of the copper price rally as too much too soon. Supporting this notion is the fact that at these prices the market will see scrap supply respond (steel prices will support steel scrap coming back on line also), as well as potentially Chinese mines and other small mines coming back online at these prices. It is even possible to see some US production restart if these prices are sustained. On copper costs we assume very slight deflation as dollar strength is largely offset by end to high grading and higher steel/other costs.”

“Nevertheless on the back of higher Chinese demand growth assumptions for 2016 and lower scrap production, our forecast for smaller surpluses and lower cost deflation sees us raising our forecasts significantly.”