Goldman Sachs: Copper prices prone to decline if Hormuz blocked

Goldman Sachs warns copper is vulnerable to further declines if the Strait of Hormuz remains blocked and has lowered its 2024 base-case copper forecast to USD 12,650/tonne from USD 12,850/tonne. Copper has fallen about 7% since recent attacks on Iran, trades well above Goldman’s fair value (~USD 11,100/tonne), and was at USD 12,400/tonne on the LME (+0.3%) at the time of the note. The bank cites higher energy prices, slower global growth and reduced investor risk appetite as downside drivers, while noting tight markets and potential strategic stockpiling could provide some support under less severe scenarios.

Analysis

An energy-driven growth shock transmits to copper via two channels: demand destruction in fabricated products (cables, motors, transformers) and higher operating costs for energy‑intensive smelters that raise effective treatment charges and slow refined throughput. Expect these effects to show up first in PMIs and refined off‑take data within 4–12 weeks, then in concentrate TC/RC and LME/SHFE basis over the next 1–3 months as traders reprice near‑term availability.

Market structure amplifies moves: financing-driven stockpiles and geographically dispersed inventories create a fragile spread between exchange stocks and physical availability. If risk premia spike, bonded/warehouse metal will remain illiquid even as headline stocks tick higher, increasing backwardation and short‑term realized vol while leaving longer‑dated forward curves supported by supply inelasticity.

Second‑order winners include scrap processors, captive‑power smelters and aluminum processors where substitution and relative input economics improve margins; losers are open‑pit miners with high opex and smelters exposed to spot energy. Political or shipping disruptions that raise freight and insurance rates will widen regional basis differentials, benefitting integrated miners with domestic smelting and penalizing traders reliant on seaborne arbitrage.

Catalysts to flip the trade: rapid re‑opening of seaborne routes (days–weeks), a surprise macro demand rebound (PMIs, months), or large strategic purchases by sovereign buyers (which would tighten physical over 6–12 months). The highest‑probability path is a near‑term downside shock followed by a multi‑quarter recovery driven by supply inflexibility, so position sizing should reflect asymmetric horizons.

Key Decisions for Investors

• Short COMEX copper (HG) 3‑month futures into rallies; target 7–12% downside over 1–3 months, stop at 5% adverse move. Rationale: demand shock manifests fastest in near‑dated futures and carries high theta for longs.
• Pair trade: short HG 3‑month futures vs long COPX 12‑18 month call spread (buy COPX Jan+ calls, sell higher strike). This shorts immediate demand risk while preserving upside to a supply‑driven rebound; aim for 2:1 asymmetric payoff (limited cost of long call spread vs open short futures exposure).
• Buy 1‑3 month put spreads on high‑opex copper miners (e.g., FCX) to capture downside volatility while limiting capital; simultaneously lighten direct exposure to miners if already long. Risk/reward: defined loss = premium, outsized gain if spot falls and spreads widen.
• Long recycling/scrap processors or vertically integrated smelters with captive power (6–12 months), e.g., selective small‑cap scrap processors or regional smelters in hydro‑rich jurisdictions. Expect relative outperformance as substitution and lower marginal costs support margins if copper weakens but energy costs remain elevated.