‘Com­mod­ity rally a false start that’s set to fiz­zle’

The Pak Banker - - MARKETS/SPORTS -

Gold­man Sachs Group Inc pre­dicted a rally in com­modi­ties from iron ore to gold will fal­ter and fore­cast cop­per and alu­minum prices will slide as much as 20 per­cent over the next year.

Any in­crease in raw ma­te­rial prices will prompt more sup­plies to en­ter the mar­ket, mak­ing it dif­fi­cult for any ad­vance to be sus­tained, an­a­lysts in­clud­ing Jef­frey Cur­rie wrote in a re­port dated March 7. The bank main­tained its bear­ish out­look for gold, said iron ore's surge would prove tem­po­rary and re­it­er­ated that oil will fluc­tu­ate be­tween $20 and $40 a bar­rel. Gold­man also said it was a good time to make bets that cop­per and alu­minum would de­cline.

"Higher prices are much harder to sus­tain in a sup­ply-driven mar­ket since sup­ply is primed to re­turn with higher prices," the an­a­lysts wrote in the re­port. "But this les­son will likely only be learned through false starts."

Iron ore is the lat­est raw ma­te­rial to join a com­mod­ity rally, soar­ing the most ever on Mon­day af­ter Chi­nese pol­icy mak­ers sig­naled their will­ing­ness to but­tress eco­nomic growth.

The 19 per­cent jump fol­lows cop­per's move back above $5,000 a ton on Fri­day, while oil rose to the high­est since De­cem­ber and gold is at the strong­est in a year.

The un­prece­dented jump in iron ore was the re­sult of a surge in steel prices be­fore China en­ters this year's peak con­struc­tion sea­son, ac­cord­ing to the bank. Ore with 62 per­cent con­tent de­liv­ered to Qing­dao leaped 19 per­cent to $63.74 a dry met­ric ton on Mon­day, Metal Bulletin Ltd. data show. That's the big­gest gain in daily data go­ing back to 2009 and the high­est price since June.

"The phys­i­cal short­fall in steel sup­ply can be filled eas­ily and the sub­se­quent de­te­ri­o­ra­tion in steel mar­gins is likely to put iron ore prices un­der re­newed pres­sure," the an­a­lysts wrote, main­tain­ing a year-end price tar­get of $35 a ton. "The mar­ket fun­da­men­tals are un­changed and the cur­rent rally is only a brief lull be­fore pro­duc­tion cuts at high cost mines are re­quired to make room for low-cost pro­duc­ers."

While a drop in the U.S. dol­lar, Chi­nese data point­ing to a surge in new credit to a record in Jan­uary as well as the gain in oil prices prob­a­bly drove a me­tals rally in 2016, the "struc­tural bear mar­ket driv­ers" that con­trib­uted to a col­lapse over the past 5 years re­main in­tact, the bank said in a sep­a­rate re­port dated March 7.

"With prices ris­ing sig­nif­i­cantly, and with the struc­tural case for base me­tals re­main­ing very poor we rec­om­mend pro­duc­ers and in­vestors with longer-term hori­zons be­gin im­ple­ment­ing hedg­ing strate­gies and con­sider short po­si­tions in cop­per and alu­minium over the com­ing month," an­a­lysts in­clud­ing Max Lay­ton wrote in the re­port. Cop­per on the Lon­don Metal Ex­change was at $4,946.50 a met­ric ton by 3:41 p.m. in Sin­ga­pore, up about 14 per­cent from a low in mid-Jan­uary. Alu­minum was at $1,593 a ton, up about 10 per­cent since Jan. 12. In Gold­man's 12-month view, cop­per may drop to $4,000 a ton and alu­minum will prob­a­bly slide to $1,350.

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