– Shuli Ren: Copper is one of Citi Research‘s favorite industrial metals as the broker expects it will see a supply deficit this year for the first time since 2011.
Analyst Ada Gao and team wrote:
In 2016, Chinese copper demand grew strongly at 3-7%, compared to consensus expectations of 1-2% at the start of the year. Looking forward, we see demand slightly moderating, but to a still-solid 3-4%. Mine supply is expected to slow notably, from 3.2%YoY in 2016E to 1.1% in 2017E, thus creating the first supply deficit since 2011. On our forecasts, copper prices will US$2.53/2.76/3.03 per lb in 2017/18/19E, respectively, or US$5,575/6,075/6,675 in US$/t terms.
Copper rose 1.7% overnight to $5,895 per ton.
MMG (1208.Hong Kong) is Citi Research’s top pick among Chinese miners because it is the purest copper play with 83% of its revenue from copper mines. Citi estimates that for every 5% rise in copper prices, MMG’s earnings can rise by 27.9%. By comparison, China Moly (3993.Hong Kong) and Jiangxi Copper (358.Hong Kong) get only 13.7% and 13.8% lift. Zijin Mining (2899.Hong Kong) gets only a 5.2% boost. (See chart)
Citi has a price target of 3.60 Hong Kong dollars for MMG, which soared 4.7% today to HK$2.89. Citi’s price target implies an up-cycle of 2.5 times 2017 book. MMG currently trades just above 1.7 times book, or its long-term average.
UPDATE: Goldman Sachs also published a bullish report on copper today. Analyst Max Layton and team wrote:
With workers at the world’s largest mine, Escondida, set to begin a strike tomorrow, and with a new Grasberg export permit yet to be granted after the prior permit expired almost a month ago (January 11), downside risks to supply appear increasingly likely to materialise and translate into copper production losses. Together, these mines were set to produce almost 9% of world mine supply in 2017.
The timing of these disruptions is important since, should they materialise over the next 3 months, they would be occurring over the same period as we expect to see a strong seasonal and cyclical uptick in Chinese demand post Chinese New Year and into 2Q17. This could contribute to a tighter 2Q market, which is normally a period of seasonal deficit (in a balanced market). With exchange copper stocks already very low, these strikes could add to anticipated physical (and spread) tightness during the 2Q.
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