Only four commodities show real promise...Copper looks good in the long term - Goldman Sachs
On a long term basis only four commodities show real promise of upside potential -copper, crude oil, corn and platinum.
Geoff Candy
20 May 2010
LONDON - On a long term basis only four commodities show real promiseof upside potential - copper, crude oil, corn and platinum.
This is the view of Goldman Sachs global head of commodity research,Jeff Currie. Speaking at the World Mining Investment Congress in London,Currie said that it is these commodities that offer the most potential as they have the tightest supply structures and are leveraged toward demand from emerging markets.
And, copper is very much at the top of the list although Currie doesforesee some pull back in prices on a short term basis.
"We have a price target of $8,150 per tonne for copper at the moment but, we expect prices to ease off to $7,500 by year end as demand shifts back to developed economies and growth in emerging markets slows somewhat. But, this is decidedly a short term move over the next six to twelve months," he says.
Indeed, Currie says he can find nothing wrong with the current fundamental picture for copper.
"Inventories are drying up, the demand pull out of China remains quite strong, the LME to Shanghai arbitrage is significantly open and floor space in China continues to grow, which is a very good indicator of copper demand.
"And," he adds, "when you look at the demand for metal in developed markets it is continuing to recover."
But, he says, "The market has sold off because of broader macroeconomic concerns which are being driven not by the macro data butbecause of the regulatory uncertainty that is clouding the picture."
It is this juxtaposition, of strong fundamental economic growth on the one side and a high level of uncertainty with regard to regulatory policy frameworks one the other that currently characterizes the commodity markets, he says.
And, while Currie was quick to emphasize the need for regulatory reform, he says "once these issues are resolved and the quicker they areresolved the sooner we can move on with our lives and actually takeadvantage of the stronger underlying economic growth."
"We are solidly in a recovery, it may lean toward emerging markets but, in the macro economic data over the course of the last few weeks has been tremendous even in Europe," he says.
Supply is the key
Currie says that the collapse in metal prices in 2008 and 2009 was driven by the collapse in GDP growth across the world rather than because of the higher prices that were experienced.
He says that economic theory will tell you that if demand is being constrained, as it was during 2008 and 2009, then supply needs to reach the same level. But, he says, if prices collapsed along with demand,then supply must be the binding constraint.
And, he adds, while in metals like aluminium, the supply constraints that were being experienced a decade ago have now largely been solved,copper's supply side on the other hand, remains a problem.