Goldman: Chinese copper demand growth could halve.

China is finding more use for the aluminium its state-owned smelters often over-produce to keep people employed. And this structural shift creates a bad prognosis for Doctor Copper himself, Goldman Sachs forecasts.

Copper has won that medical moniker as it is viewed as a barometer of world economic health, much of which is powered by Chinese industrial demand.

But the red metal's role in global development, particularly China's, is about to change significantly, Goldman analysts led by Max Layton say.

They point out, in a research note reiterating their bearish view, that China's State Grid plans to replace copper with aluminium in power cables.

That sorts out a major Chinese problem.

Many Chinese cities have their own aluminium smelter, and production can be kept overly high to ensure GDP targets laid down by Beijing are met. The market is now over supplied, however, since the government applied the brakes to state investment in new infrastructure in an attempt to curb overcapacity and deflate a credit bubble.

But it also means, the Goldman team says, that:

as much as half of 2016 Chinese demand growth could be lost"

The Goldman team explains:

An increased rate of substitution to aluminium alloy, from copper, is highly likely...the China price of copper is 3.4 times that of aluminium (and substitution becomes profitable at a ratio of 2.5/1). Notably, China's State Grid stated in late 2014 that aluminium substitution of copper has significant importance because Chinese copper and aluminium resources are relatively unbalanced – copper resources are in severe shortage (reliance on imports >75%) but aluminium reserves are sufficient and domestic aluminium smelting capacities are oversupplied.

.

The bank's maths is based on its own forecast of demand, however. The analysts write:

We estimate that between 100kt and 250kt of copper demand could be lost owing to this development in 2016, compared with our base case of 400kt China demand growth in 2016.

Goldman targets $5,200/t for the copper price. (Three-month futures are at $6,015/t.)