Copper: Not out of the woods yet!

Sugandha SachdevReligare Commodities Research

Copper prices have stumbled sharply over the last few weeks eroding almost 15% of the gains from the May highs. The cut deepened gradually with what appeared initially as just a normal correction, after a remarkable task done by the bulls that pushed the prices towards Rs.420/kg odd levels all the way from the lows of around Rs.333/kg in the beginning of this year. The rally started to lose ground once the dismal economic numbers from China and US started to resurface all over again. Chinese growth stalled to 7.0 percent, the lowest level in six years that rung the alarm. Despite of Chinese government’s significant monetary stimulus efforts in the form of reductions in both the reserve requirement ratio and lending rates over the last several months, the industrial metal has botched to sustain gains. Concerns that arose over the bond default in China’s construction sector after a Chinese property developer that defaulted on its dollar bonds during 2015, kept the industrial metal’s demand under check. Prices also faced the heat of a steady dollar, amidst the uncertainty on back of the ongoing Greece episode that hurt investors’ risk appetite. There has been some bounce from the lows seen recently, after the US GDP data which suggested that US economy contracted less than previously estimated in the first quarter and growth has rebounded in the second quarter. Although global growth is expected to be around 2.8% percent this year creating demand for mined commodities like copper, there are several macroeconomic issues that can spoil the party and meaningfully impact the recovery path. Refined copper imports from China have fallen close to 275,000 tonnes in May, down 12.4 percent year- over- year, suggesting that the demand is still not very robust from the world’s biggest consumer of the industrial metal. To add to the woes its May exports have fallen by 2.5%, less than the expectations of a 5% drop, but imports dropped 17.6%, much more than the slide of 10.7% that was expected. Meanwhile Peru, the world’s third biggest producer expects its copper output to rise 13 percent this year to 1.56 million tonnes and 66 percent in 2016, which would create excess surplus, while China's refined copper output has also risen 5.5 percent in May from a year ago to 652,379 tonnes, adding to the surplus. Other latest survey reports continue to show concerns of ample supply in copper emerging from higher mine output which could continue to result in a global surplus growing to 399,000 tonnes in 2015,from a surplus of 316,000 last year. Also prices will continue to traverse downwards by lower cash costs at mines, which have declined by an average 11 percent due to improved cost control, fall in oil prices and currency movements. Last but not the least, copper is entering seasonal demand slowdown period in the next quarter suggesting prices can drift further lower. The fundamental and the technical setup is suggesting that the red metal is not out of the woods yet and traders are therefore advised to initiate fresh short positions on rise towards Rs.380-382/kg levels, eyeing near term targets of Rs.352-350/kg, while maintaining a stop loss above Rs.395/kg on a closing basis.