Despite a recent recovery in London Metal Exchange copper prices, market analysts were still bearish this week on the metal's price for the rest of this year, based on factors such as a surge in supply and a weak Chinese construction sector.
Analysts at Goldman Sachs forecast copper prices would sink to $6,200/mt by the end of the year, compared with a price at $6,845/mt as of early Wednesday trading.
"In particular, we believe [Chinese] copper-intensive construction completions growth is set to remain weak for the rest of 2014, given the already weak new [housing] starts data," the analysts said Tuesday in their Commodity Watch report. "Looking further ahead, any continued weakness in new starts would have bearish implications for completions in [the second half of 2015] and 2016.
"While our nationwide measures suggest that inventories are likely to be high, our Real Estate team expects the government to stem any systemic risks by supporting property sales and prices," they added. "The early read on the April/May data is that sales growth has remained very weak, and easing measures relatively narrow."
Without a pickup in China's property sales, the analysts said, there is some downside risk to Goldman Sachs' forecast for Chinese copper demand growth of 6% for this year and 5% in 2015.
With a similar bearish view, Societe Generale Group analysts focused on copper's supply side.
"We expect the copper market to move into a wider surplus of 470,000 mt from an estimated 50,000 mt last year and copper prices to decrease," they said in Wednesday report. "Copper is still trading 26% above its long-run cost of production (which includes fixed costs and operating costs) whereas we will likely end up having an inventory surplus as mine supply is accelerating."
They also cited the China factor.
"As China still accounts for 35-40% of global copper consumption, while a large amount of copper has been accumulated in bonded warehouse used for profitable lending, 'fine tuning' from the [Peoples Bank of China] won't initiate strong Chinese copper demand ... and rapid unwinding of the copper currently tied up, as in the early-March panic, would likely drag copper prices on the downside."
The Goldman Sachs analysts had a more upbeat view on copper and other commodities, however, over the longer term.
"The current lack of direction in commodity markets does not impact our longer-term strategic views of commodity returns -- which remain positive, particularly as our economists expect the global growth recovery to get further underway into 2015," they said.
In the copper market specifically, they said, demand seems to be improving outside of China, and the outlook suggests continued improvement.
"On the supply side, we remain in a once-in-20 year supply cycle," they said. "Though concentrate bottlenecks and temporary smelter issues are present, we believe these are temporary factors that should be looked through as treatment charges will likely resolve these over time."
Goldman Sachs predicted a pattern of price decline then rebound for copper, with prices hitting $6,200/mt by the end of the year, then bouncing back to $6,600/mt by April 2015.
