Commodity Call. Copper in a relief rally

Copper prices have made a smart recovery from their six-year low, hit three weeks ago. The copper futures contract on the COMEX (Commodity Exchange Inc) fell to a six-year low of $2.21 per pound in August and reversed higher by 10.8 per cent to current levels of $2.45.

On the domestic front, the copper futures contract traded on the Multi Commodity Exchange (MCX) has surged 11.7 per cent from its low of $326.1 per kg recorded last month to ₹364 now. The MCX Copper futures contract moves in tandem with COMEX Copper.

Two major events have triggered the sharp reversal in the metal. One is the data showing that the Chinese imports of copper ore and concentrate surged 19 per cent in August from the previous month. News reports also say that the country has approved railway projects worth $11 billion. These developments from China have partly eased the concerns of weak copper demand from the world’s biggest consumer. Prior to this revival, concerns about a slowdown in China had dragged copper prices lower by 20 per cent between April and August.

The second is that Glencore Plc, one of the world’s top producers, announced that it would suspend production from two of its African mines. The company has plans to slash output by 4 lakh tonnes over the next 18 months. Earlier last month, Freeport McMoran Inc had announced that it would reduce its copper sales by 150 million pounds per year for the next two years (2016, 2017). Fear of supply disruption after this move from these two companies has also supported the recent rally in copper.

But can this price rally sustain? On the charts the recent price reversal from the six-year low is very significant. It suggests that the rally could continue in the coming weeks as well.

But the immediate threat that can play spoilsport is the upcoming US Federal Reserve meet this week. If the commodity pack suffers a strong sell-off after this event, then copper prices could come under pressure once again.

COMEX Copper has been moving in a bear channel since August 2012. The contract has reversed sharply higher after recording a six-year low of $2.21 per pound on August 24. This reversal has also happened from the channel support level, suggesting that the channel remains intact. Immediate resistance is at $2.5. A strong break above this level will take the contract higher to $2.60. A further break above $2.60 will take it to the next target of $2.70.

This will also increase the chances of the rally extending further towards the upper end of the channel, which is currently poised around $2.84 over the medium term.

Significant support for the copper contract is in $2.40-2.35 zone. The 21-day moving average, at $2.33, is the key support to watch. A decisive break above this level has strengthened the outlook for copper, as the contract was unable to break past this level all through the year. Only a strong fall below this 21-day moving average support will now turn the outlook negative. In such a scenario a fall to $2.20 is possible.

On the domestic front, the MCX Copper contract has formed a strong base around ₹325. Immediate resistance is at ₹370. A strong break above this level can take the contract higher to ₹390 in the coming weeks. A further break above this level will see the contract heading for ₹400 and ₹410 over the medium term. The bullish view will come under threat if the contract declines below ₹325. The next targets on such a fall will be ₹320 and ₹310.

The MCX-Copper futures contract has a key short-term resistance at ₹371 — the 200-day moving average level. Inability to breach this hurdle can trigger a corrective fall towards ₹355 and ₹350 in the short term.

If the contract manages to surpass resistance at ₹371, then the current rally can extend to ₹380 or ₹385 from here. As of now, support for the contract is in ₹350-345 zone. The 21-day moving average at ₹344 is the key short-term support for the contract.

The outlook will turn bearish only if the contract falls below this support level. The ensuing target on such a fall will be ₹328.

COMMENT NOW