Tim Treadgold: Copper recovers as gold stumbles, possibly signalling a metal-markets sea-change
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Gold rules for investors in mining today for understandable reasons that include trade war uncertainties and ultra-low interest rates, but we might have just felt the first gentle puff from the winds-of-change that mark the return of interest in oversold base metals such as copper.
Over the past few days gold has been buffeted by a surprise sell off which has rubbed $US66 ($96) an ounce off the international price, and an even more impressive $118/oz off the Australian price, with the local move accentuated by a 1.5 US cent rise in the A-dollar exchange rate.
Copper, on the other hand, has added 10 US cents a pound over the past week to sell for $US2.63/lb, its highest in two months.
At its latest price of around $US1489/oz gold, it is still 23 per cent up on the $US1209/oz at this time last year and 30 per cent up on the Australian price at this time last year of $1677/oz.
Copper, without anyone seeming to notice, is back to roughly where it was at this time last year, reflecting slightly stronger than expected demand and weaker-than-expected supply — a combination which is offsetting the worst effects of the trade war.
Why the gold price has suddenly contracted could be due to any number of reasons but the major factor seems to have been a series of big sell orders on European markets as several institutional investors took profits from their gold holdings.
Increased confidence in a trade-war resolution also helped create a “risk on” mood which has encouraged investors to shift funds out of gold, the ultimate safe haven, plus a series of investment bank reports which suggest that industrial commodities are overdue for a price recovery.
Morgan Stanley, one of the best-connected US banks, said there were “early signs of life” in copper as demand for the most important of the industrial metals “emerges from the doldrums”.
Macquarie said all of the base metal miners it tracked had “upside” to the bank’s earnings forecasts, especially the nickel miners which were enjoying the price boost of Indonesia’s proposed ban on the export of unprocessed ore.
But it’s the copper producers such as OZ Minerals (ASX:OZL) and Sandfire Resources (ASX:SFR) which stand out as stocks poised to benefit most, having been sold down sharply to now find themselves potential beneficiaries of a copper-price recovery and the entry of bargain-hunting investors.
OZ, which has seen its shares fall by 15 per cent since April to latest trades at $9.24 is seen by Macquarie rising back to a multi-year high of $11.20 over the next 12-months. Sandfire, which has also fallen by 15 per cent to trade around $6.34 is not expected to do as well but could rise to $6.70.
“We remain positive on most of our base metal miners,” Macquarie said. “Independence (ASX:IGO) and OZ remain our preferred picks due to their robust profit margins and abundant growth options, while Western Areas (ASX:WSA) is our preferred nickel exposure.”
The significance of the Macquarie view is the high level of optimism that earnings from base metals such as copper and nickel remain strong despite the weaker international economic outlook.
Whether the case for base metals is stronger than gold seems unlikely but markets always overshoot both ways, on the up leg and the down leg, and it could be that gold has done its best work for this year and base metals are now playing catch-up.
Morgan Stanley certainly appears to believe that’s the case with demand for copper proving to be stronger than expected and supply proving to be constrained by a lack of growth in ore production and a worldwide decline in ore grade.
Until recently it was hard to be confident about copper, but that could be changing.
“As the copper market emerges from a seasonally slow third quarter there are some early signs of demand growth, and we see rising upside risk to the copper price in a market that is still struggling to grow supply,” Morgan Stanley said.
“China is the most likely source of a demand recovery with market signals turning positive.”
On the supply side of copper, constraints remain with Morgan Stanley seeing a modest increase in mine output of around 1 per cent year-on-year with expansion at the big Escondida and Grasberg mines being offset by a cutback in the Mutanda mine in Africa.
“With lower inventory and weak supply growth, a continued market deficit in the December quarter of this year and into 2020 is likely to bring more meaningful support for the copper price.”
For Australian investors the signals coming off the gold and copper markets are significant and while no-one is suggesting that the gold price might surprise with a weak end to 2019 that is a possibility after such as strong 12-months.
Copper meanwhile is showing the effects of supply struggling to keep up with demand and that almost certainly means a higher price next year.
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