Goldman Sachs upped its target for copper prices based on the outlook for global growth and because the market now faces a potential deficit next year, not the surplus it and others previously forecast.
Copper broke through $7,000 a ton for the first time in three years last week, and Goldman boosted its forecast for copper to average $6,750 in the near term, up from $6,200. The firm's commodities strategists said the move was based on dollar weakness and fading worries about China's economy and policy tightening.
The analysts also said the five years of surplus into 2016 is now over and the market should face a deficit of 130 kilo tons in 2018, versus its previous forecast of a surplus of 150 kilo tons. Combining the outlook for demand and growth and currencies, the analysts said the price of copper has the potential to rise above $8,000 per ton by 2022.
Goldman raised its average 12-month target to $7,050 from $5,500 per ton. The analysts, including Jeffrey Currie, global head of commodities research, said based on the dollar's decline alone, copper would have risen to $6,600 per ton. The dollar index is down 8.1 percent year to date.
LME futures were trading just above $7,000 per ton Tuesday, while copper futures on the CME were trading at $3.19 per pound. Copper futures for December on the CME are up 27.7 percent year to date, and Goldman notes they have risen 60 percent from their trough in early 2016.
"It is true that sentiment has been quite bullish and fundamentals such as inventory and time spreads are not sending particularly strong signals," the Goldman analysts wrote. "That said, copper net speculative length, although at a multi-year high, still tracks China manufacturing PMI closely, suggesting that the recent rally is not completely out of line with fundamentals."
The Goldman analysts also said the markets "have not fully appreciated the synchronized nature of global growth and reduced downside risks from China."
The business cycle is behind the growth in demand, and the large wave of mine supply expected did not materialize. The analysts raised their forecast for overall copper demand to an increase of 2.5 percent in 2017, from 2.2 percent previously. They also expect demand to average 1.8 percent for 2017 to 2022.