COPPER PREFERRED BASE METAL : Goldman Sachs JBWere downgrades most commodities price forecasts

Despite a dire outlook for commodities prices, Goldman Sachs JBWere analysts say copper is their preferred base metal because of severe production constraints and the potential for Chinese restocking.

Author: Dorothy Kosich - Posted: Tuesday , 18 Nov 2008

RENO, NV -
Australian investing banking and securities group, Goldman Sachs JBWere, Monday made further downgrades to commodity price forecasts for 2008 and beyond, reflecting a deteriorating outlook for base metals, iron ore and some types of coal.

Nevertheless, analysts Malcolm Southwood, Paul Gray and Kirstine Veitch declared that "copper remains our preferred base metal because of severe production constraints, and the very real potential for Chinese restocking."

The analysts cut their copper global demand forecast for next year to 1.6%, including a 4.1% decline in the OECD and a 7% increase in emerging markets. "This latter includes our assumption of a 250kt restocking in China; without this assumption or ‘real' consumption growth forecast for the emerging markets falls to 4.3%."

"Our contacts in China believe that cash and credit constraints argue against an extensive industry restocking, but that a significant volume of buying by the government (i.e. the Strategic Reserve Bureau is very likely. Certainly such a move would be consistent with the SRB's historic behaviour, and we believe that the current price pull-back offers China a very attractive buying opportunity," the analysts said.

Copper

Goldman Sachs JBWere suggests that copper stands apart from other major base metals on the supply side. Five of the world's largest copper producers have told the analysts that they expect to produce less copper in 2009 than in 2008. "In our view it is by no means implausible that the copper supply could register zero growth in 2009."

The analysts forecast a modest copper deficit for 2010 and an essentially balanced market in 2011 and 2012. Their key messages: short-term price risk is for further downside due to recessionary demand conditions further impaired by the global financial situation; and a forecast that the copper price "should be significantly higher than it is today" in 12 months.

Nickel

Meanwhile, Goldman Sachs JBWere asserts that global stainless steel production will be flat this year, meaning nickel consumption will only grow by 1.1% with the market recording a 41kt surplus.

"We forecast a modest 3.1% increase in stainless steel production in 2009, weighted into the second half of the year, which should translate into a similar quantum of growth for global nickel consumption. But there is a considerable amount of nickel supply due on stream in 2009," the analysts said.

"Beyond 2009 our model shows an essentially balanced market and an improving stock-to-consumption ratio, but our concern is that the upside potential for price is capped by higher NPI [Nickel Pig Iron] production," they added.

Zinc

The analysts said they have been impressed with the speed of the announcements of zinc product cuts, "albeit mainly from mines that had been reopened during the period of high prices. Furthermore, there are signs that prices are now sufficiently low that a China's artisanal zinc mining sector is at last beginning to contract."

Goldman Sachs JBWere now suggests a zinc equilibrium price of 63-cents per pound in 2009 with a steady price improvement from 2010 as the market moves back into balance, then deficit.

Uranium

Consistent with their forecasts for lower annual average price in coal, oil and gas, the analysts lowered their average annual average price forecasts for uranium, from 2009 to 2011.

Iron Ore

The analysts further reduced their iron ore contract price forecast, which they expect to fall 30% in benchmark terms for Australian fines in JFY 2009/10, compared to their previous forecast for a 15% decline.

Coking Coal

Blast furnace steel production is declining globally, "not least in the major coking coal import markets of Europe and India," the analysts said. "Moreover, merchant coke prices are falling sharply and cancellations/deferrals of spot cargoes of coking coal are becoming increasingly frequent."

"Against this backdrop we believe contract prices for all grades of metallurgical coal will fall sharply from current elevated levels." Goldman Sachs JBWere predicted.

Thermal Coal

However, the analysts have taken a less aggressive approach to downgrading thermal coal price forecasts "as demand from coal-fired power generators should hold up slightly better than demand from steelmakers in a worsening economic environment. Moreover, recent settlements by major power utilities (notably the Japanese) demonstrate that key buyers are still prepared to pay a significant premium to ensure adequate supply of good quality coal on contract."

Nevertheless, the analysts reduced their JFY 2009/10 forecast to US$90/t, a 28% decline from the prevailing benchmark of US$125/t.