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Goldman sees copper rising as deficit looms on supply threat

Barclays, UBS also see potential for prices to climb this year.

Copper will extend gains as the global market swings to shortage because of sustained demand from China and potential supply disruption at the world’s two biggest mines, according to Goldman Sachs Group. A deficit this year would be the first since 2011, says Citigroup.

“We expect copper will move into deficit in the coming months, driving the next leg higher in prices,” analysts including Max Layton and Jeff Currie wrote in a report received on Wednesday. While the bank’s six-month target remains at $6 200 a metric ton, risks surrounding the forecast are skewed to the upside, they wrote. The metal advanced 1.5% to $5 884 in London on Wednesday.

Prices have surged by more than 25% over the past year as demand recovered and investors anticipated higher infrastructure spending and tax cuts from U.S. President Donald Trump. Copper is one of Citigroup’s most preferred metals, while Barclays Plc and UBS Group say higher prices are likely on the back of supply disruptions this year.

While there are concerns about monetary tightening in China, the moves have been small and are in the context of a credit boom, the Goldman analysts said. The acceleration in demand from the metals-intensive industries of the old economy because of strong credit growth will help create a shortage in the copper market, according to the bank. Prospects for supply disruption at Escondida in Chile and Grasberg in Indonesia increase potential for gains. 

Workers at Escondida vowed to start an indefinite strike Thursday as talks with BHP Billiton failed to produce an agreement following weeks of collective bargaining. In Indonesia, exports from Freeport McMoRan’s mine in Papua province have halted as the company negotiates with the government on the terms under which it operates in the country.

Freeport may start curbing production if the ban on concentrate shipments continues. “We have a limited amount of storage space and we would need to take steps no later than mid-February,” chief executive officer Richard Adkerson said on a conference call last month.

Barclays has forecast a surplus of 39 000 tons this year, assuming 5% of worldwide primary production of 20.7 million tons is lost to disruptions. A stoppage at Escondida would remove about 24 000 tons a week, potentially pushing the market into a deficit, the bank said last week.

UBS sees supply disruptions increasing in 2017 from last year and forecasts prices to average about $6 600 a ton, according to Sydney-based analyst Daniel Morgan. Citigroup sees a global shortage of 59 000 tons this year.

© 2017 Bloomberg

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