Goldman Sachs Calls for Copper Deficit as Supply Disruptions Loom

Supply concerns bumped the red metal's price up 2 percent on Wednesday.

goldman sachs

Disruptions at top-producing copper mines are looming, and analysts at Goldman Sachs (NYSE:GS) now say they expect the metal to move into deficit in the coming months.

Workers at BHP Billiton’s (NYSE:BHP,ASX:BHP,LSE:BLT) Chile-based Escondida copper mine went on strike Thursday (February 9) after their union failed to reach a new collective agreement with management. Unlike other recent labor actions the strike could be lengthy.

Escondida is the world’s largest copper mine, and accounts for about 5 percent of global copper output. The mine produced 452,0000 tonnes of copper during the half year ended December 31, 2016, unchanged from the same period a year earlier. Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) and Mitsubishi (TSE:8058) hold minority stakes in the mine.

The strike at Escondida comes on top of the news that Freeport-McMoRan (NYSE:FCX) plans to scale back output at its Grasberg copper mine in Indonesia amid a smelter strike and issues surrounding the renewal of its mining permit. Grasberg is the second-biggest copper mine in the world.

Analysts forecast copper deficit

“The timing of these disruptions (at the Escondida and Grasberg mines) is important since, should they materialize over the next three months, they would be occurring over the same period as we expect to see a strong seasonal and cyclical uptick in Chinese demand post Chinese New Year and into the second quarter of 2017,” Goldman analysts said in a note.

“We expect copper will move into deficit in the coming months, driving the next leg higher in prices,” they added. A deficit this year would be the first since 2011, according to Citigroup (NYSE:C), which is calling for a global shortage of 59,000 tonnes in 2017.

Standard Chartered (LSE:STAN) says that more than 5,000 tonnes of copper production could be lost each day that output from Escondida and Grasberg is curbed. That means a strike of 25 days would equate to lost output of 85,000 tonnes.

“Traders were already bullish into the strike,” Danes Davis, a commodities research analyst at Barclays (LSE:BARC), said. “This was on the radar for a while. People have watched the negotiations deteriorate.”

Copper price rises

While a deficit could be in the cards longer term, the immediate impact of the disruptions at Escondida and Grasberg has been a copper price increase. On Wednesday, three-month copper on the LME gained more than 2 percent during trading to reach $5,925 a tonne.

The global supply threat could push prices even higher, analysts say. “It’s presenting the market with a bullish case for a little upside,” Vivienne Lloyd, base metals analyst for Macquarie in London, told CNBC.

There has been some positivity about the copper price since it surged late last year. Along with Goldman Sachs, firms such as UBS (NYSE:UBS) expressed optimism about the metal’s prospects in 2017. The former called for the copper price to rise to $6,200 a tonne over the next six months, while the latter said the metal could reach more than $6,600 a tonne.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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