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Goldman Sachs mining commodity forecasts

London, 16 January 2013

Goldman Sachs have released their mining commodity supply, demand and price forecasts for the short, medium and long term, following the extension of their economists annual GDP and IP forecasts. This includes updated annual price forecasts for 2013-2017, as well as long-term prices, for the bulk commodities (thermal coal, metallurgical coals, iron ore), as well as base and precious metals, mineral sands, and rare earths. These forecasts form the basis of Goldman Sachs' Global Investment Research mining equity models.

Copper, palladium and metallurgical coal preferred in 2013

"Taking into account anticipated producer margins and industry structure, as well as outright price upside/downside, our most preferred mining commodities are copper, palladium, and metallurgical coal, and least preferred are aluminium, nickel and zircon, on a 12-mo horizon (N.B. we have not changed any of our 3-, 6- or 12-mo commodity forecasts). Over the medium to long term we are most bullish on the prospects for palladium and metallurgical coal (especially premium hard coking coal).

"The most significant changes to our forecasts are the downgrade of our 2013 zircon price forecast to $1,350/t (from $1,500/t), and the lowering of our 2014 aluminium price forecast to $2,050/t (from $2,204/t), with the latter following the build out of a smelter by smelter Chinese supply model and resulting increased confidence in supply growth. Finally, we downgrade our 2014 zinc price forecast to $2,175/t (from $2,326/t), to account for lower- than-anticipated marginal Chinese output costs."

Establishing long-term commodity prices: Copper in the spotlight

"In addition to releasing a number of mining commodity long-term price forecasts, we provide detailed justification of our c.$6,600/t ($3/lb) real copper price forecast (2013 dollar terms), which ‘kicks in’ in 2018 at $7,660/t. Our long-term copper price view is derived from our “incentive price” and “cost curve” forecasting methodologies, and supported by the fact that 5-year copper forwards have averaged almost $8,000/t ($3.63/lb) over the past two years."

Base metals – Bullish copper (for now), incrementally bearish on aluminium, nickel We remain bullish on the outlook for copper in 2013, with prices expected to average $8,458/t, though we expect prices to move down to average $7,250/t in 2014 and $6,875/t in 2015. From current prices we are cautious on the outlook for aluminium over the short, medium and long term, bearish on nickel (from prices above $17,000/t), and relatively constructive on zinc on a medium/long-term horizon (from prices sub $2,000/t).

Gold – Cycle set to turn on improved macro outlook?We expect higher gold prices in coming months given our economists forecast for weak growth early in 2013 as well as the uncertainty associated with the debt ceiling and potential budget sequestration. Assuming that the sequester does not take effect on March 1, we expect that the cycle in gold prices will likely turn later this year on improving US growth with prices gradually decreasing over the next five years to stabilize near $1,200/oz. For more details on our recently updated gold framework, please see Precious Metal Outlook: Gold cycle set to turn on improving US recovery, December 5, 2012.

PGMs – Structurally bullish on palladium; platinum to be supported only near term

South African supply issues have seen both platinum and palladium rally in recent weeks. However, we expect palladium will remain tight over the course of 2013-2015 and as such forecast that it will outperform platinum which is forecast to remain broadly in balance over the same period.

Bulk commodities – Bullish thermal coal, iron ore in its final phases?We believe iron ore will continue to see super-normal prices in 2013 (average $144/t), followed by a transitional year in 2014 (average $126/t). The iron ore market is headed for a long period of significant oversupply, in our view, but this is still two years away (see Global: Mining: Iron age not over: stay bullish and position for next phase, October 15, 2012). Relative to the other bulk commodities, metallurgical coal was the worst performer in 2012 with prices down 29%. However, we believe that current prices are below marginal production costs and see 17% upside potential versus spot relative to our 2H2013 forecast of $185/t for premium HCC (see Global: Commodities: Metallurgical coal in a world of slower growth, August 21, 2012). Finally, we believe that seaborne thermal coal prices will trade within a range of $90-100/t set by: a) the China arbitrage price on the upside; and b) marginal production costs on the downside (see Mining Commodities: Coal price recovery to continue but upside is capped, December 10, 2012).

Ends --

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