Copper on a downtrend since 2016 beginning so far, should you buy?

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Published: June 4, 2016 12:24:01 PM

Copper prices have witnessed a downtrend since the beginning of 2016 with a 3 per cent fall. Also, since encountering a significant...

Is copper a good buy at the present level and what are the factors likely to impact it? (Reuters)Is copper a good buy at the present level and what are the factors likely to impact it? (Reuters)

Copper prices have witnessed a downtrend since the beginning of 2016 with a 3 per cent fall. Also, since encountering a significant medium-term resistance at Rs 340/kg in early May, the contract has been on a downtrend. It has made double-bottom at Rs 305/kg and is consolidating at the moment.

Is copper a good buy at the present level and what are the factors likely to impact it? The uncertainty regarding future demand along with the stronger dollar and weaker global economic picture have weighed on copper prices this year.

We could see a supply-demand balance in the global copper market in 2016 and 2017.

According to the report released by the International Wrought Copper Council (IWCC) last week, the global copper market is expected to be in a broadly balanced state in 2016 and 2017. Considering the fact that China is the biggest consumer of base metals, the economic situation of China will have an impact on copper prices. Since China is the largest copper consumer (roughly 40 per cent of global copper consumption), it’s important for investors to keep track of Chinese copper demand indicators.

United States is the second largest copper consumer, accounting for 9 per cent of global copper consumption. Strong housing and automotive demands bode well for US copper consumption. In fact, the US economy is improving and that was why we saw surge of copper prices in February and March.

However, strong US economic data have again raised expectations of an interest rate hike by the Fed. Copper prices in MCX which surged in April are again down in May. One of the reasons for downfall is profit growth at China’s industrial firms slowed in April, in line with other data for the month which suggested the economy may be losing steam again after picking up earlier in the year. In addition to that, the timing of the interest rate hike is also affecting copper prices this year

According to the recent sentiment, the probability of the June interest rate hike has risen, which in turn is weighing on copper prices. Copper is in downward trend. MCX Copper Jun is trading well below 50 and 200 day moving average confirming the bearish trend.

As mentioned earlier, after medium-term resistance at Rs 340/kg in early May, the contract has been on a downtrend and has made double-bottom at Rs 305/kg and is consolidating at the moment. This makes Rs 305/kg an important support and if Copper breaks that level, we may witness renewed selling till Rs 290-285/kg.

Many investors may think copper has corrected from Rs 340 to Rs 308/kg and could be a value buy. But all indicators are showing copper is not in oversold territory. Investors are advised not to go for bottom fishing as we don’t see any strength in the metal. In fact, every rally has been sold into. Now it’s short term resistance is at Rs 320-322/kg which is its 200 day moving average. If Copper stays above this level,only then we can say that the bottom has been placed of Rs 305/kg. At present, Copper is languishing around its support. Positive sentiment and long buying is only recommended when it closes above Rs. 336/kg.

Aasif Hirani is Director, Tradebulls

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