April 30, 2013 GS Copper 60
Incentive price tested; cost support downside limited
Cut and pasted from 1st of 11 pages. Get it, read it, very timely, they know their stuff.
Copper price sell-off overdone, constructive on near term
Goldman Sachs’ commodities team last week lowered near-term copper
price forecasts following the recent sell-off. Chinese growth concerns,
increased LME stocks, investor positioning and a broader commodity selloff
combined to place downward pressure on copper prices. Copper
underperformed other major base metals partly due to the fact that it was
the only metal trading above its cost curve and an increasing consensus
that the market is headed for surplus in 2014. We believe the copper
market sell-off is overdone and remain bullish on the outlook for copper
prices over the next 3- to 6-month period, albeit from lower prices.
Spot price testing incentive price estimate
The copper price has traded down to US$6,842/t (US310c/lb) in recent
weeks, which compares to our GS Copper 60 estimated average copper
price requirement of c.US$7,300/t (US330c/lb, real 2013 US$) to deliver a
15% IRR, testing our view on incentive pricing support and placing
additional risk on marginal projects with higher levels of capital intensity.
Impending surplus justifies move to marginal cost support…
We have previously argued that in times of tightly balanced markets that
incentive pricing provides the best estimate of the required long-term
copper price, as well as a support level in the near term. This is principally
based on the fact that marginal cost support alone is not sufficient to
incentivise most potential new projects required to meet demand over the
longer-term horizon. Our forecast of an upcoming copper market surplus,
although transient in nature, justifies a move to marginal cost support
pricing, at least in 2014/15 where we forecast an average c.500kt surplus.
… but downside to marginal cost is limited
We estimate UK-listed copper stocks reflect a copper price of US$7,240/t,
slightly above current spot and in line with our incentive price estimate. We
believe that downside is limited, with total cash cost support estimated at
US$6,733/t, up from US$5,667/t in 2011. Applying a conservative 5% p.a.
inflation to the current marginal cost level lifts the 2014-15 marginal cost
estimate to US$7,070/t and US$7,423/t. Taking a more conservative view
and using the 75th percentile as a basis, the 5% inflation assumption in
2014-15 results in costs of US$5,982/t and US$6,281/t. Our existing 2014-15
copper price forecast of US$6,925 /t and US$6,875 /t suggests cost support
between the 75th and 90th percentile of the cost curve.