 "Commodity rally is set to fizzle out")
Goldman Sachs Group Inc predicted a rally in commodities from iron ore to gold will falter and forecast copper and aluminium prices will slide as much as 20 per cent over the next year.
Any increase in raw material prices will prompt more supplies to enter the market, making it difficult for any advance to be sustained, analysts including Jeffrey Currie wrote in a report dated March 7. The bank maintained its bearish outlook for gold, said iron ore's surge would prove temporary and reiterated that oil will fluctuate between $20 and $40 a barrel. Goldman also said it was a good time to make bets that copper and aluminium would decline. "Higher prices are much harder to sustain in a supply- driven market since supply is primed to return with higher prices," the analysts wrote in the report. "But, this lesson will likely only be learned through false starts."
Iron ore is the latest raw material to join a commodity rally, soaring the most ever on Monday after Chinese policy makers signaled their willingness to buttress economic growth. The 19 per cent jump follows copper's move back above $5,000 a tonne on Friday, while oil rose to the highest since December and gold is at the strongest in a year.
Ore surge
The unprecedented jump in iron ore was the result of a surge in steel prices before China enters this year's peak construction season, according to the bank. Ore with 62 per cent content delivered to Qingdao leaped 19 per cent to $63.74 a dry metric ton on Monday, Metal Bulletin data show. That's the biggest gain in daily data going back to 2009 and the highest price since June.
While a drop in the dollar, Chinese data pointing to a surge in new credit to a record in January as well as the gain in oil prices probably drove a metals rally in 2016, the "structural bear market drivers" that contributed to a collapse over the past five years remain intact, the bank said in a separate report dated March 7.
Shorting copper
"With prices rising significantly, and with the structural case for base metals remaining very poor we recommend producers and investors with longer-term horizons begin implementing hedging strategies and consider short positions in copper and aluminium over the coming month," analysts including Max Layton wrote in the report.
Copper on the London Metal Exchange was at $4,946.50 a tonne by 3:41 pm in Singapore, up about 14 per cent from a low in mid-January. Aluminum was at $1,593 a tonne, up about 10 per cent since January 12.
In Goldman's 12-month view, copper may drop to $4,000 and aluminium will probably slide to $1,350 a tonne. Deleveraging in China and emerging markets, further dollar strength, mining cost deflation and strong supply growth, particularly in copper because of a prior boom in capital expenditure, are set to keep "capex-heavy" metals prices under pressure over the coming year, the bank said.
"Overall we find that the likelihood of a sustained improvement in Chinese demand during 2016-17 is low," Goldman said.
Oil glut
Meanwhile, the current oil market is still oversupplied and prices have to remain lower for supplies to meaningfully shrink and re-balancing to take place, Goldman said. "Only a real physical deficit can create a sustainable rally which is still months away should the behavioral shifts created by the low prices in January and February remain in place," the bank said.
Goldman also stood by its recommendation to short gold and said US data will likely reinforce a stronger dollar, which will drag down prices toward its near-term target of $1,100 an ounce. Spot bullion was 0.4 per cent higher at $1,272.05 an ounce on Tuesday.
Any increase in raw material prices will prompt more supplies to enter the market, making it difficult for any advance to be sustained, analysts including Jeffrey Currie wrote in a report dated March 7. The bank maintained its bearish outlook for gold, said iron ore's surge would prove temporary and reiterated that oil will fluctuate between $20 and $40 a barrel. Goldman also said it was a good time to make bets that copper and aluminium would decline. "Higher prices are much harder to sustain in a supply- driven market since supply is primed to return with higher prices," the analysts wrote in the report. "But, this lesson will likely only be learned through false starts."
Iron ore is the latest raw material to join a commodity rally, soaring the most ever on Monday after Chinese policy makers signaled their willingness to buttress economic growth. The 19 per cent jump follows copper's move back above $5,000 a tonne on Friday, while oil rose to the highest since December and gold is at the strongest in a year.
Ore surge
The unprecedented jump in iron ore was the result of a surge in steel prices before China enters this year's peak construction season, according to the bank. Ore with 62 per cent content delivered to Qingdao leaped 19 per cent to $63.74 a dry metric ton on Monday, Metal Bulletin data show. That's the biggest gain in daily data going back to 2009 and the highest price since June.
While a drop in the dollar, Chinese data pointing to a surge in new credit to a record in January as well as the gain in oil prices probably drove a metals rally in 2016, the "structural bear market drivers" that contributed to a collapse over the past five years remain intact, the bank said in a separate report dated March 7.
Shorting copper
"With prices rising significantly, and with the structural case for base metals remaining very poor we recommend producers and investors with longer-term horizons begin implementing hedging strategies and consider short positions in copper and aluminium over the coming month," analysts including Max Layton wrote in the report.
Copper on the London Metal Exchange was at $4,946.50 a tonne by 3:41 pm in Singapore, up about 14 per cent from a low in mid-January. Aluminum was at $1,593 a tonne, up about 10 per cent since January 12.
In Goldman's 12-month view, copper may drop to $4,000 and aluminium will probably slide to $1,350 a tonne. Deleveraging in China and emerging markets, further dollar strength, mining cost deflation and strong supply growth, particularly in copper because of a prior boom in capital expenditure, are set to keep "capex-heavy" metals prices under pressure over the coming year, the bank said.
"Overall we find that the likelihood of a sustained improvement in Chinese demand during 2016-17 is low," Goldman said.
Oil glut
Meanwhile, the current oil market is still oversupplied and prices have to remain lower for supplies to meaningfully shrink and re-balancing to take place, Goldman said. "Only a real physical deficit can create a sustainable rally which is still months away should the behavioral shifts created by the low prices in January and February remain in place," the bank said.
Goldman also stood by its recommendation to short gold and said US data will likely reinforce a stronger dollar, which will drag down prices toward its near-term target of $1,100 an ounce. Spot bullion was 0.4 per cent higher at $1,272.05 an ounce on Tuesday.