Commodity Call. Copper gets rolling again

Copper has posted a smart price recovery in the last three months after beginning this year on a negative note. The commodity tumbled 14 per cent in January. However, thereafter, it has climbed back about 20 per cent. The copper futures contracts traded on the Multi Commodity Exchange (MCX) tumbled from ₹399 a kg in December to ₹343 in January and now trade at ₹414.

What triggered this price reversal? Sarika Agarwal, fundamental research analyst, Karvy Comtrade, says this is due to “China’s weak economic data, which has increased speculation about more stimulus announcements from the country.”

China is the world’s largest consumer of copper, accounting for about 40 per cent of global consumption.

In addition, Goutam Chakraborty, research analyst, Emkay Global Financial Services, says the recovery in copper prices followed the drop in the US dollar and increase in oil prices.

The dollar index has tumbled 4 per cent in the last one month while crude oil has posted a whopping gain of 24 per cent in the same period.

The International Copper Study Group (ICSG) forecasts the global market for refined copper to be at a surplus for the next two years. Recent data from the ICSG shows that in 2015 there will be a surplus of 364 million tonnes.

The surplus situation is expected to prevail in 2016 as well but is expected to come down to 228 million tonnes. Expectations for demand to increase at a faster rate of 3 per cent as compared to a 2.5 per cent growth in production could take surplus lower next year, according to ICSG. The major factor that could drive demand would be China’s industrial usage, which is expected to grow 5 per cent. Although the surplus could cap the upside for copper price, analysts feel it might not have a major impact and there is not much downside threat for metal at least in the near term.

“The drawdown in inventories and increase in premium are suggesting that demand is picking up. Also, this is a cycle and in general there is a surge in copper demand in the second quarter of the year, adds Sarika of Karvy Comtrade. Data from Bloomberg shows that inventory in the Shanghai Futures Exchange has come down by about 24 per cent to 0.19 million tonnes on April 30 from 0.25 million tonnes on April 2. The premium in the European markets has gone up from $45 a tonne to $50 a tonne in April due to seasonal demand, according to Sarika.

China and the US rate hike are going to be the key determinants of copper price, going forward. The recent rally in copper was due to expectations of a Chinese stimulus. So, prices may correct if China fails to announce a stimulus. Chakraborty adds, “The Fed’s September rate hike is already priced into the market. The language of the US Federal Reserve at the time of the rate hike and the pace at which it decides to do it would be important to watch and it can influence copper price.”

Short-term view : The outlook is bullish. But there is a series of key resistances at current levels in the ₹418-422 zone within which both the 100- and 200-week moving average levels are placed. Failure to breach ₹422 — the 50 per cent Fibonacci retracement resistance — can trigger a corrective fall in the short term. In that case the contract can reverse lower towards ₹400.

On the other hand, if the contract manages to breach ₹422 decisively, then the current rally can extend further to ₹443 — the 61.8 per cent Fibonacci retracement resistance level. The short-term outlook will turn negative if the contract records a strong break and closes below the psychological support level of ₹400. Such a break can drag it lower to ₹390 and ₹385 thereafter.

Medium-term view : The sharp rally in April has broken the downtrend in the contract since August 2013. Supports at ₹385 and ₹377 — the 21-week moving average — are the key levels to watch. Given the rally in the last three months has been very strong, declines to the above mentioned support would only attract fresh buying interest coming into the market rather than adding downside pressure.

Having said this, an immediate break and fall below the ₹385-377 supports looks unlikely.

As such, a rally to ₹450 looks more imminent in the medium term.

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