Commodity analysts at Goldman Sachs have detailed a new tactical opportunity for investors, explaining that a supply glut will mean copper will see some significant price pressures in the coming months.
Copper weakness relative to zinc strength has been one of the bank's core views throughout 2016, and that view was renewed Thursday with a fresh call on what it describes as its "metal supply divergence trade."
"Over the next three to six months we believe that copper will continue to underperform zinc, with copper about to hit a wall of supply, while the zinc concentrate market continues to tighten," the team of analysts, led by Jeffrey Currie, said in a note.
The suggested trade is to sell LME copper March 2017 contracts against a half of a unit long position in the LME zinc March 2017 contract, which Goldman Sachs said would offer a potential return of around 18 percent. Its six-month price targets for copper and zinc are $4,200 per ton and $2,500 per ton, respectively.
Three-month copper on the London Metal Exchange slipped on Thursday morning after weak export data from China, with the contract now trading at $4,776 per ton, according to Reuters. It recently reached a two-month high of 4,889 per ton at the end of September.
"In copper, we expect the main catalyst for the downside will be accelerating oversupply, but we are also conscious that we are entering a weak seasonal period for demand during which period inventories tend to build and prices often come under pressure," the team added.
"In zinc, the catalyst for further upside is that we expect a further substantial tightening of the concentrate market over the winter, which should result in zinc smelter production curtailments in China."