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Should Freeport Investors Follow Goldman’s Bullish Bet This Time?

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Goldman’s bullish bet

Goldman Sachs (GS) has been bearish on base metals including copper and aluminum for quite some time. In August, the brokerage warned of a “supply storm” in copper and said that it expects copper prices to fall to $4,000 per metric ton.

Earlier in 2016, Goldman Sachs was projecting a record surplus in the aluminum market. On the contrary, aluminum markets appear to be headed for a deficit this year. A deficit occurs when there is demand in excess of production. Markets are in a surplus condition when production exceeds demand.

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Deficit projections

However, Goldman also seems to have turned bullish on copper now. According to Reuters, citing Goldman analyst Max Layton, copper markets could be in a deficit of 180,000 metric ton next year. Previously, the brokerage was projecting a surplus of 360,000 metric ton for 2017.

Supply-side factors

The supply side of the equation has been somewhat supportive of copper prices. Along with the curtailments by companies like Freeport-McMoRan (FCX) and Glencore (GLNCY), weather-related disruptions in Chile, which is the world’s largest copper producer, have impacted copper supply. Chile’s copper production has fallen this year.

There have also been unplanned outages, such as in Las Bambas, Peru, where protests by local communities halted production. Freeport’s Grasberg mine also faced labor disruptions in 3Q16. Rio Tinto (RIO) (TRQ) is Freeport’s partner at the Grasberg mine. Another key factor affecting copper supply is falling ore grades. BHP Billiton’s (BHP) Escondida is a case in point, wherein lower grades have negatively impacted production profile.

In the next part, we’ll discuss in more detail how Chinese demand is supporting copper prices.

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