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Goldman Sees Metal Rally in Sight on Rerun of '08 China Stimulus

  • Fixed-asset spending poised to fuel copper, nickel shortage
  • Credit expands at pace “not seen since the financial crisis”

A rerun of China’s massive stimulus during the financial crisis is set to offer another boost to global metals prices, according to Goldman Sachs Group Inc.

Strong credit expansion has “remarkably bullish” implications for the nation’s metals-intensive industries as fixed-asset investment and manufacturing are poised to accelerate, the bank said in a report. New lending to the so-called old economy in December and January jumped by 1.1 trillion yuan ($160 billion) from a year earlier, equivalent to more than one and a half years of U.S. President Donald Trump’s mooted infrastructure package, it said.

Industrial commodities have enjoyed a rebound in the past year on improved demand from property and infrastructure in China, the world’s top metals user. The benchmark copper price in London is up 32 percent from a year ago, while iron ore has nearly doubled. This time last year, the Chinese government embarked on a massive credit-driven stimulus in response to an economic slowdown, boosting credit at a pace not seen since the 2009 financial crisis.

“The resulting acceleration in metals demand is expected to push the copper market, as well as other base metal markets such as nickel and zinc, into deficit, leading to inventory draws, a tightening of the futures curve spreads, and higher prices,” the bank’s analysts including Mikhail Sprogis and Jeffrey Currie wrote in the note dated Feb. 16.

2008-09 Stimulus

In the note, Goldman evokes the China’s 2008-09 stimulus, when the nation embarked on massive infrastructure spending to offset cratering global growth following the western financial crisis. This time around, President Xi Jinping’s government is trying to prop up the economy, while grappling with growing debt and overcapacity. New lending to the old economy in the two months to January jumped 50 percent to 3.3 trillion yuan from a year ago, the bank said.

The pick-up in Chinese copper demand “is likely to happen during a period when inventories normally draw due to seasonal factors,” Goldman said. “This is expected to magnify the inventory draw and tighten spreads, pushing copper into backwardation.”

Copper in London traded at $6,051 a ton by 5:26 p.m. Hong Kong time, after reaching the highest price since May 2015 earlier in the week. The bank maintained its price forecast at $6,200 a ton.

— With assistance by Martin Ritchie

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