In 2016, MCX Copper has rallied by 1.85% while COMEX copper has rallied by 3%, making it the worst performing base metal, while commodities like zinc and lead have appreciated by 55% and 42%. Other base metals like aluminum and nickel all have posted double-digit gain this year. Copper has been underperformer this year and sentiment may remain sluggish next year also on back of China’s decline in refined imports as their domestic production of copper is increasing.
Copper is also inversely related to US dollar since copper is traded in US currency so any appreciation in US dollar will have negative impact on copper prices. This fourth quarter, rally in US dollar was seen as more talks of increasing US interest rate was happening. This placed added pressure on copper prices. Inventories of copper remain at high levels. On the London Metal Exchange (LME) over 3,65,000 tonnes of stock is there which is close to the highest level since 2013. Inventories in China also remain at very high levels as lots of copper metal continues to be financed because of interest rate and currency differentials. Copper is trading above its production cost. So, the current price promises that more output will be added to current stockpiles. Base metals like Zinc and Lead are experiencing supply deficits and so have fundamental reason to remain at elevated prices.
Citigroup Inc. said last week that it was constructive on copper prices over the next 12 months because new supply had reached capacity and demand had increased in China, the world’s biggest user. Inventories from Shanghai Futures Exchange are slumping indicating movement of copper reserves out of China into LME warehouses in Asia. There was ray of sunshine for copper starting this year as Chinese imports of copper surged earlier this year. But now they have fallen back as effects of earlier stimulus by the Chinese government have started waning.
On the supply side, global mine production continues to increase, despite ongoing supply disruptions. The International Copper Study Group (ICSG) estimates world mine production to have increased by 4.5% in 1H 2016 compared to 1H 2015. Guidance from ICSG indicates mined supply for 2016 is likely to be lower than expected, due to factors including ore processing challenges and weather related disruptions. In MCX, Copper has major resistance at Rs 340 per kg. This year, twice it failed to surpass that level. Moreover it is creating lower top which is an indication of weak market where any rise in price is attracting seller. Chart pattern indicates copper may again re-test the levels of Rs 310-305. Any short term positive movement is only expected above Rs 330. So traders should only take long position if copper manages to close above Rs 330. Buying opportunity emerges at Rs 306-305. Long term view is that copper is making bottom. Consolidation is happening in copper and only if it breaks above Rs 340 or below Rs 300 then any long term trend will emerge.
(The author is director, Tradebulls)