Commodity Call. Copper may still retain sheen

Copper prices have been very volatile this year. Prices tumbled nearly 17 per cent in the first three months of 2014. The recovery from March halted in August and from there the prices slipped again. Stronger dollar and the slowdown in major economies, including China and the Euro Zone, are weighing on copper prices.

The copper futures contract traded on the Multi Commodity Exchange (MCX), which tumbled to a low of ₹391.8 per kg in March, hit ₹439.4 in August and is at ₹415.6 now, down some 11 per cent for the year.

The global market for refined copper is expected to end with a deficit of 0.3 million tonnes in 2014, according to the International Copper Study Group (ICSG). However, the market is likely to run into a surplus next year after five consecutive years of deficit, adds ICSG. In 2015, refined copper production is expected to increase by 4 per cent to 23.1 million tonnes. The increase in supply will be contributed by expansion of existing mines and also from new mines. On the other hand, the demand is expected to grow only by 1.4 per cent to 22.71 million tonnes. This will leave the market with a surplus of 0.39 million tonnes in 2015. Slowdown in China, the world’s largest consumer of copper, would be a major drag.

The industrial demand in China for copper is expected to rise at a slower rate of 5 per cent in 2015 as compared with 7 per cent this year, according to the ICSG.

The surplus of copper in the market will be absorbed if demand picks up globally.

Although the US has ended its quantitative easing, fresh stimulus announcement from other major economies is an advantage for the commodity. Navneet Damani, Associate Vice President, Commodity Research, Motilal Oswal Commodities Broker, says, “the recent stimulus packages from the Euro Zone, Japan, could help demand to improve and thereby limit any further sharp fall in copper price in the future.”

The construction sector eats up a large volume of copper supply every year. The US building construction, in specific, consumes about 30 per cent of the global copper. The growth in US housing construction has stagnated in recent times. Any revival in this sector in the future could lend support and limit the fall in copper prices.

Medium-term view : The MCX-copper futures contract has been on a strong downtrend since August 2013. The contract recorded a high of ₹512.65 on August 8 and tumbled about 20 per cent from there. However, the broad sideways consolidation between ₹390 and ₹450 since March suggests that the downtrend since August last year could be nearing the bottom. Strong trend line support is at ₹400. Though this support level can be tested in the near term, an immediate break below this level looks less likely. Having said this, every dip towards ₹400 from the current level will be good buying opportunity in MCX-copper futures contract.

Traders with a medium-term perspective can go long at current levels. Stop-loss can be placed at ₹395 for a target of ₹440. Any intermediate dips to ₹400 if seen could be a good opportunity to accumulate more long positions.

Resistance for the contract is at ₹425. A strong break above this level can take the contract higher to ₹440.

This bullish outlook will get negated if the contract records a strong weekly close below ₹400. Such a break will bring fresh selling pressure into the market and drag the contract lower to ₹360 — the 100-month moving average support level.

Short-term view : The MCX-copper futures contract has been consolidating sideways between ₹403 and ₹423 in the short term over the last one month. Within this range, the contract dipped to a low of ₹403.1 in the first week of November and has been moving higher from there.

The possibility for the contract to rally further in the coming days towards ₹423 — the upper end of the current short-term range — is high.

A breakout on either side of ₹403 and ₹423 will then determine the next trend for the MCX-copper futures contract. A decisive break above ₹423 will be bullish for the contract. It will then open doors for the next target of ₹435. On the other hand, declines below ₹403 could be bearish.

However, the presence of a medium-term trend line support at ₹400 could limit the downside in MCX-copper futures contract to ₹400 and ₹398 even on a break below ₹403.

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