Why copper may turn red hot in 2014

Improvement in the US housing market and higher consumption in China's power sector could drive prices higher



Copper prices in the international market have been under pressure because of a surplus in the market. Spot copper prices on the London Metal Exchange have crashed 28 per cent from the highs in 2011 to $7,336/tonne now. But the outlook for the current year is better with initial signs of a global economic recovery.

In India, thanks to a weak rupee and a relatively better demand scenario, copper prices have largely been range-bound and have not dropped sharply. Going ahead, domestic prices will track international price trends as rupee stabilises.

Demand-supply imbalance

Data from the World Bureau of Metal Statistics shows that since 2008, with the exception of only the year 2010, supply has always exceeded demand in the global copper market. The International Copper Study Group (ICSG) expects refined copper production in 2014 to increase by 5.5 per cent led by Chinese expansions and the new copper mines. However, demand is expected to grow by only 4.5 per cent this year according to ICSG, resulting in a surplus supply situation.

But recovery in Chinese and US demand may change the picture and limit the downside in copper price.

China and the US together account for about 52 per cent of global copper consumption. Demand from the US housing market, which is a key driver of copper price, is showing signs of recovery. Housing starts in the US have increased from the 2011 low of 5,42,000 units to 9,86,000 units in December 2013. Also, the new home sales data is encouraging. A proposed spending increase in China’s power sector could also help in price recovery. So, a reversal looks likely in copper prices in the later part of 2014 helped by a demand recovery.

Indian copper prices will largely be driven by global trends going ahead. Rupee is expected to be more stable hereon. India accounts for a mere 2 per cent of the global copper consumption. The domestic demand is on the rise since 2011. Indian copper consumption rose 3.4 per cent in 2011 and 4.6 per cent in 2012.

Data available from the World Bureau of Metal Statistics shows that there was a 9.3 per cent rise in consumption till October 2013.

Outlook

Long-term view: The MCX-Copper futures contract (₹455.5 a kg) is in a long-term uptrend. There is strong support at ₹390/kg. A fall to this support cannot be ruled out in the coming months. But declines to ₹390 may see buying interest emerging in the market. A reversal from this support can take the contract to ₹520.

This is a key long-term resistance for the contract.

A breach of this level can take the price to ₹590. On the other hand, a failure to break above ₹520 can see the contract reversing lower again.

Medium-term view: The medium-term trend for the contract is also up. Within this uptrend, the contract is now witnessing a corrective fall. Recovery in rupee from its all-time low of 68.85 has dragged the contract lower. Immediate resistance is at ₹475. A strong break above this resistance can see a rise to ₹500.

The 200-week moving average at ₹410 is the key medium-term support level that can limit the downside. Inability to breach the immediate resistance at ₹475 can pull the contract lower to ₹410.

Short-term view: Day traders, however, need to exercise caution as the short-term trend in the contract is down.

From the all-time high of ₹512.65 recorded in December on the back of a weak rupee, the contract has declined about 11 per cent. The contract has been consolidating sideways between ₹428 and ₹475 over the last few weeks.

The 200-day moving average currently at ₹440 is a key immediate support. A break below this support can take the contract to ₹428, the lower end of the current range. On the other hand, failure to decline below the 200-day moving average will be positive for the contract.

It will increase the probability of the price breaking above ₹475. The target on a breach of ₹475 will be ₹490.

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