Copper Deep in Trouble, but There is Light at the End of Tunnel, According to Goldman Sachs

Copper prices are spiraling down as investors increasingly downplay the prospects of a decisive economic recovery in China this year. The red metal is under pressure as a slew of data in recent weeks showed that the post-Covid recovery in China, which consumes about half the world's copper, is stalling. Unlike previous slowdowns, Beijing has been easing support for most industrial metals by not allocating large amounts of money for infrastructure or real estate.

So metal markets faced significant pressure after disappointing macroeconomic data from China for April, which served as a vital reality check. Wednesday, May 24, has brought fresh bearish news from China. Concerns have now emerged about local government debt, which is often used to finance infrastructure projects. Globally, weak demand for copper is reflected in stocks on the London Metal Exchange, which have nearly doubled since mid-April.

Copper fell 1.4% to $7,988 a ton on the LME and was trading at $8,019.50 as of 1:46 p.m. in Shanghai. The metal is down about 11% this quarter alone.

While China has been a major source of disappointment for the copper market, there hasn't been much help from the U.S. demand either. The Federal Reserve's aggressive campaign to tighten monetary policy has been steadily undermining industrial and consumer demand for copper. Investors were expecting a pause, but recent comments from officials suggest the central bank may have to keep raising rates.

However, Goldman Sachs Group – known to be bullish on copper – is still optimistic and said the commodity prices will "come roaring back" if fears of a global recession are dispelled. Copper will return to $10,000 a ton by this time next year, analysts wrote in its recent research note.

At this point, the key spread is also signaling that supply is outpacing demand. The spot price for copper is $66 a ton over 3 months of LME futures. This is the widest contango – where futures are trading at a premium to the spot price – since 1994 data inception.