Worst could be over for copper,,,

by Mr. Gurumurthy K

Copper prices have retracted from last month’s lows. An improving US housing market and stronger Chinese consumption with the country’s Purchasing Managers’ Index rising to a seven-month high of 50.8 in June, 2014 have boosted sentiments.

Following trends in the international market, the copper futures contract traded on the MCX has also risen.

It has rallied about 10.6 per from its low of Rs. 394.55 per kg recorded on June 9, 2014

US housing demand..

The construction sector consumes about 30% 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% rise in the US new home sales, coupled with a 6.5% 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 news of a scandal in China. This involved a trading company using fake documents to raise a loan many 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 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 June hold 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 supply to exceed demand by 4,05,000 tonnes in 2014 as compared with a 2,83,000-tonne deficit in 2013. Also, the surplus is projected to widen to 5,95,000 tonnes in 2015.

An oversupply condition could be one factor which could limit the upside in copper prices.

Outlook...

The long-term outlookfor the MCX-copper futures contract ( Rs. 436.55 per kg) is bullish. The sharp 23.6 per cent fall from the August 2013 high of Rs. 512.65 found a bottom at Rs. 391.8 in March this year. (2014)

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.

A key long-term trend line support is at Rs. 395. While the contract remains above this level, a rise to Rs. 520 looks likely in the long term. The long-term outlook will turn bearish only if the contract records a strong close below Rs. 395. The ensuing target on such a break will be Rs. 350.

The medium-term outlookfor the MCX-copper futures contract too is bullish. The contract had formed a double bottom between the middle of 2014 March to June. 

A bullish breakout 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 Rs. 422 and the 21-week moving average at Rs. 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 Rs. 452, the target of the double bottom pattern. This level is also the key 50 per cent Fibonacci retracement resistance level.

Short-term,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 the current level at Rs. 438. The 200-day moving average is also poised near the current level at Rs. 433.

Inability to sustain above Rs. 433 now and rise from current levels to breach Rs. 438 could turn the short-term outlook bearish for the contract.

It can trigger an interim fall in the contract price to Rs. 428 and Rs. 425 in the short term. However, since the broader outlook is bullish, the downside can be expected to be limited.

Src: The Business Line 

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