Goldman Says Commodity Rally a False Start That's Set to Fizzle

What's Driving the Surge in Iron Ore?
  • Calls for shorting copper, aluminum as price slide forecast
  • Supply-driven market means stronger prices prompt more output

Goldman Sachs Group Inc. predicted a rally in commodities from iron ore to gold will falter and forecast copper and aluminum prices will slide as much as 20 percent 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 aluminum 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 percent jump follows copper’s move back above $5,000 a ton 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 percent content delivered to Qingdao leaped 19 percent to $63.74 a dry metric ton on Monday, Metal Bulletin Ltd. data show. That’s the biggest gain in daily data going back to 2009 and the highest price since June.

“The physical shortfall in steel supply can be filled easily and the subsequent deterioration in steel margins is likely to put iron ore prices under renewed pressure,” the analysts wrote, maintaining a year-end price target of $35 a ton. “The market fundamentals are unchanged and the current rally is only a brief lull before production cuts at high cost mines are required to make room for low-cost producers.”

While a drop in the U.S. 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 5 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 metric ton by 3:41 p.m. in Singapore, up about 14 percent from a low in mid-January. Aluminum was at $1,593 a ton, up about 10 percent since Jan. 12.

In Goldman’s 12-month view, copper may drop to $4,000 a ton and aluminum will probably slide to $1,350. 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 U.S. 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 percent higher at $1,272.05 an ounce on Tuesday.

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