Goldman’s Commodity Outlook Buckles Under Deflation ThreatRamsey Al-Rikabi
Cheaper energy and the U.S. dollar’s advance are darkening the outlook for commodities, according to Goldman Sachs Group Inc.
The U.S. bank cut its forecasts for metals and mined raw materials including copper, gold and iron ore over the next three years by about 10 to 20 percent as production costs shrink, according to an e-mailed report Friday.
Oil has led a collapse in commodities after a decade-long bull market boosted output, spurring gains in inventories. Falling prices are threatening to prolong the rout as they make it cheaper to produce more, worsening the oversupply that triggered the slump, according to Goldman.
“The primary reason for the changes to our forecasts is cost deflation,” the bank’s analysts including Max Layton wrote in the report, citing “actual and anticipated U.S. dollar strength, cheaper energy and other input costs and our expectation of an improvement in mining productivity.”
The Bloomberg Dollar Index, which tracks the currency against 10 peers, is set for its highest level in data going back to 2004 amid speculation the Federal Reserve will become the first central bank among major economies to raise interest rates this year.
As the greenback appreciates against the currencies of commodity-producing nations, the relative cost of production on a dollar-basis drops. The Bloomberg Commodity Index of 22 raw materials slid 17 percent last year, the most since the 2008 financial crisis, and is 3 percent lower in 2015. Brent crude has fallen 57 percent from a peak in June.
The dollar is surging against currencies including the yen and euro as the Fed take steps to tighten monetary policy while central banks in other developed economies inject further aid to boost growth and stave off deflation.
“We are seeing the start of a U.S. dollar bull market,” the Goldman analysts wrote. “We see this as a bearish backdrop to mining commodity pricing over the next 12 months.”
Credit constraints in China, the world’s biggest user of metals and energy, is curbing growth and slowing demand for mined commodities. The nation’s economy expanded at the weakest pace since 1990 last year. A gauge of manufacturing showed a second month of contraction in January.
Copper, gold and iron ore are at risk of falling the most, the bank said. It’s most bullish on palladium, nickel and zinc.
Copper is passing through a once-in-20-year supply cycle as demand weakens amid a slowdown in China’s property market, the bank said. It cut its forecast to $5,542 a metric ton for this year from a previous projection of $6,400. Copper was at $5,511 on the London Metal Exchange on Friday, tumbling 24 percent in the last 12 months.
“We remain bearish on copper for 2015 despite the price declining more than 20 percent over the past year,” the analysts wrote. “We expect the fundamentals to weaken further over the coming 12 months.”
The iron ore market faces a sustained period of oversupply and the bank now sees the steel-making ingredient averaging $66 a ton in 2015, down from an earlier estimate of $80, according to the report. Iron ore with 62 percent content delivered to Qingdao, China, cost $66.42 a ton on Friday. It has lost 47 percent in the last year.
Gold will decline from the third quarter of 2015, when the bank predicts the U.S. will start raising interest rates. Prices will slide through 2016 as the U.S. economy continues to expand while easing lending conditions and lower oil prices will help growth in other developed economies.
Goldman Sachs reduced its bullion forecast for next year to $1,089 an ounce, from $1,200 previously. Prices in London fell to $1,289.90 on Friday, trimming a third weekly gain.
Lower oil and cheaper bank loans are helping to extend a rebound in U.S. automobile sales, pushing palladium further into a supply deficit, according to the bank. Small amounts of the precious metal are used to reduce harmful exhaust emissions. Goldman forecasts prices to rise 24 percent in the next 12 months and sees them at $988 an ounce in 2016, unchanged from its previous projection. Palladium was last at $767.75.
Nickel will advance as ore supplies tighten and inventories shrink in China, the biggest consumer, according to Goldman. The full impact of Indonesia’s ban last year on unprocessed minerals hasn’t yet been felt in the market, which is swinging into a deficit, it said.
The bank lowered its forecast for the metal this year to $16,550 a ton from $17,500 previously because of weaker global demand even as it still sees “significant upside” to prices. It was trading at $14,270 a ton on Friday.
“A few outliers are likely to buck the trend of falling prices,” the analysts wrote. “Commodities that were out of favor in the last bull market and which, consequently, were starved of capital, will now be out of phase with major commodities such as iron ore and copper.”