Derivatives

Worst could be over for copper

Gurumurthy K | Updated on November 22, 2014

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Pick up in US housing sector and China’s improving growth prospects may turn sentiments positive

Copper prices have retracted from lows of last month. Improving US housing market and a stronger Chinese consumption with the country’s Purchasing Managers’ Index rising to a seven month high of 50.8 in June, have all boosted sentiments. Following trends in the international market, the copper futures contract traded on MCX has also risen. It has rallied about 10 per from its low of ₹394.55 per kg recorded on June 9.

US housing demand

The construction sector consumes about 30 per cent of the copper produced globally. The US housing sector, one of the major consumers of copper in the world influences copper prices. A sharp 23 per cent rise in the US new home sales coupled with a 6.5 per cent rise in the existing home sales between March and May signals a revival in the US housing market. This is good news for copper. If this trend continues in the housing market, copper prices may rise further.

China scam- not a worry

Copper prices fell very sharply in June after the break out of the news of the scandal in China. This involved a trading company using fake documents to raise a loan that is multiple times the actual quantity of copper in its warehouse.Though this is a concern for the copper market, it is a known risk now. Also, the smart recovery in copper prices from the middle of June is a clear indication that the impact of this probe on metal financing deals on copper price in future could be limited.

Signals of a revival in the Chinese economic growth could overshadow any negative news for the commodity. The HSBC manufacturing Purchasing Managers’ Index of China rising to 50.8, its seven month high and the Services PMI growing at the fastest pace in 15 months at 53.1 in Junehold promise.

According to the International Copper Study Group the copper market is forecast to turn into a surplus for the first time after four consecutive years of deficit. It expects the supply to exceed demand by 405 thousand tonnes in 2014 as compared to a 283 thousand tonne deficit in 2013. Also, the surplus is projected to widen to 595 thousand tonnes in 2015. Over supply condition could be one factor which could limit the upside in the copper price.

Outlook: Long-term view

The long-term outlook for the MCX-copper futures contract (₹434 per kg) is bullish. The sharp 23.6 per cent fall from the August 2013 high of ₹512.65 found a bottom at ₹391.8 in March this year. The reversal from this low has happened from just above an important long-term trend line support which has kept the overall bullish outlook intact. Key long-term trend line support is at ₹395. While the contract remains above this level, a rise to ₹520 looks likely in the long term. The long-term outlook will turn bearish only if the contract records a strong close below ₹395. The ensuing target on such a break will be ₹350.

Medium-term view

The outlook for the MCX-copper futures contract is bullish in the medium-term perspective as well. The contract had formed a double bottom between the middle of March to June. A bullish break out of this pattern was witnessed in the first week of July thereby reversing the previous downtrend and also turning the outlook bearish. The neck-line of the double bottom pattern at ₹422 and the 21-week moving average at ₹415 are the key medium-term support levels for the contract. Intermediate declines to these levels could attract fresh buying interest in the market. The contract can rise to ₹452, the target of the double bottom pattern. This level is also the key 50 per cent Fibonacci retracement resistance level.

Short-term view

The MCX-copper futures contract is hovering just below a key short-term resistance level. The 38.2 per cent Fibonacci retracement level resistance is just above current levels at ₹438. The 200-day moving average is also poised near current levels at ₹434. Inability to rise from current levels and breach ₹438 could trigger an interim fall in the contract price to ₹428 and ₹425 in the short-term. However, since the broader outlook is bullish, the downside can be expected to be limited.

Published on July 13, 2014

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