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ANZ Research upbeat on copper amid China's wind power push; BMO demurs

Australia's ANZ Research believes that copper consumption is greater than high-level investment data suggests, having adjusted its copper model to accommodate the shift in investment toward renewable energy, particularly in China.

However, Canada's BMO Capital Markets has a more bearish view amid industrial headwinds and lowered its estimates for most of the metals and mining stocks it covers as a result.

ANZ said in a Sept. 25 note that while there are concerns around weaker economic growth and an escalating trade conflict weighing on copper sentiment, "things do not look nearly as bad" when considering that five times more copper is used in wind generator construction per megawatt of capacity than in coal-fired or hydro generators.

Overall, ANZ calculated that copper demand from the renewable energy sector is up 20% year over year in 2019 in China only.

ANZ has traditionally tracked overall grid investment in China to calculate copper demand from the power sector, which makes up 36% of total demand. While growth in investment has been weak, with year-to-date spending down 14%, ANZ believes that a shift toward wind and solar capacity in 2019 means the bank's copper demand model now suggests overall Chinese growth of 4.5% in 2019.

This projection is supported by other data, such as semifabricated copper output which is up 3% year over year for the January-to-July period.

Yet even with such growth, ANZ said supply issues will push the market into a deficit this year and in 2020 and thus sees the downside for the copper price as "limited."

In this context, the U.S.-China trade talks in Washington in October will be important. Sources told CNBC that talks will resume Oct. 10.

"Any agreement, even a token one, should see prices respond positively," ANZ said.

ANZ Senior Commodity Strategist Daniel Hynes said in an interview that while the bank only looks at copper demand from wind power in China currently, it will endeavor to incorporate the rest of the world in coming months.

However, Hynes said the fact that China has distinct targets over the next decade around renewable energy suggests "this trend has only just begun."

Reuters reported China's energy regulator as saying in April that the Asian country would prioritize the construction of wind and solar projects that can operate without subsidies in 2019 and cap new subsidized capacity, which Hynes said is China's "blue skies" policy coming to the fore.

For the moment, Hynes believes that China's renewables projects are driven more by social costs, rather than purely economic ones.

"Even if subsidy-free renewable projects are more expensive, they are likely to continue to be built," Hynes said.

Broader bearishness

BMO was more bearish, saying a "stuttering global industrial economy" was continuing to weigh on many commodity prices as global trade "grinds to a halt."

As China's construction cycle shifts from strong starts to strong completions, BMO has a tactical preference for base metals over steel and bulk commodities.

BMO said its most significant commodity price reductions from an equity-exposure perspective are for copper, steel and aluminum/alumina, adding that it maintains a general preference for the base metal-exposed equities over bulk commodity and steel producers.

One of BMO's notable revisions was downgrading First Quantum Minerals Ltd. to "market perform" from "outperform" without making any changes to its operating assumptions, slashing its target price per share to C$11.50 from C$15.

The move was largely due to lowering its copper price outlook by 5.6% for the fourth quarter of 2019 and by 9.7% for 2020.

The firm's biggest commodity price revision was to nickel, reflecting the Indonesian ore ban and the Philippines' nickel mining suspension uncertainty, while also pushing its 2020 to 2023 forecasts higher.

BMO now expects average nickel prices of US$15,495 per tonne in 2019, US$19,000/t in 2020 and US$16,000/t in 2021, up 30% to 60% over previous forecasts. It anticipates "peak pricing" at US$21,500/t on average during the first quarter of 2020.

However, BMO's long-run price of US$16,535/t remains unchanged, and it has not adjusted its long-term incentive price of US$7.50 per pound, believing that the current tighter fundamental backdrop will incentivize enough ex-Indonesia nickel units.

BMO also increased its medium-term cobalt price forecasts between 2020 and 2022, projecting a 7.9% rise in 2020, 25% by 2021, and 10.7% by 2022, reflecting Glencore PLC's decision to shutter its Mutanda operations for care and maintenance by the end of 2019.

The prevailing economic climate has already prompted BMO to increase its gold and silver price forecasts by an average of 14% and 22%, respectively, over the next 12 months and by an average of 11% and 12% through 2022.