Have Copper prices topped out?

Religare Commodities

Copper prices had a magnificent run up over the last few weeks where the prices have marked a sharp recovery all the way from four year lows of Rs 332.80/Kg to Rs 398/kg odd levels. The rally took the bears with a surprise and is absolutely no way close to what they have augured few weeks back down the line. The steep upside in the red metal; that acts as a proxy for the industrial metals, originated primarily on the news of a drought in Chile. This disrupted production of copper notably, given the fact that Chile remains world's biggest producer of the base metal.

Adding to the supply side chaos, world’s third largest mine situated in Indonesia was shut down due to a labor dispute. These developments attracted the dormant bulls to try their luck amidst rejuvenated expectations of these hinges resulting into a reduced projected surplus for the current year. However, the odds turned more favorable after the U.S. Fed meet, where they did not come up with an aggressive statement to raise interest rates in near future, which took some steam off the dollar index.

A weaker U.S. currency makes dollar-denominated assets such as metals cheaper for buyers holding other currencies. The sentiments were also boosted on back of the expectations that China would continue with the initiative of building infrastructure, thereby increasing its demand for copper. At the same time, the activity in China's factory sector that has dipped to an 11-month low in March, is signaling persistent weakness in the world's second-largest economy. This is ringing more alarming bells for its central bank to come up with yet another stimulus programme, which is supportive for the industrial metals, especially copper. Away from China, the U.S. recovery has been gathering pace, with the country likely to want more red metal and the fresh stimulus announced by the ECB is turning out to be an aid of the last resort for the Eurozone economies. But the big question remains whether the prices would continue to march or will the bears who have suddenly disappeared will show up to take control of the trend once again? The soaring inventories at LME clearly point towards the declining demand. This year's build in copper inventory is definitely not a good sign for the bulls. This was supposed to be a year of supply surplus already and thanks to a mini boom in copper mining which is feeding in to rising refined copper output.

On the other hand, the subdued demand from China looks structural and permanent, the biggest consumer of the metal, where refined copper imports for the month of February remained down 24.33 pct, year on year at 211,609 tonnes.The macro fundamentals suggest that it will not be an easy task for the prices to sustain at higher levels, the rally might have clung on some straws but more green shots does not look very imminent in the near future. The fact that the interest rates in the US are likely to rise this year, which is just a matter of time now and the hiccups in the Chinese and European economies are strong enough reasons to check further rise in the prices .

The technical set up also suggests that the counter has neared its major resistance zone of Rs 395-400/kg, where it is likely to meet lot of supply. All in all, traders are advised to take some profits off the table while aggressive traders can even start initiating fresh shorts on rallies hereafter, while keeping an eye on the major resistance of Rs415/kg.