Ravindra Rao
On hopes of demand in China improving, copper, the chief of industrial metals, touched the highest level in two years on LME. July marks the biggest monthly advance since January as traders took on bullish bets.
A series of macro-economic data came from China, fuelling a rally in copper. As economists have turned positive about China’s economy, copper, with other industrial metals, has recently gone up. Initial data for July have added to the picture. China’s GDP, industrial production, retail sales, import-export and trade-balance data, all have beaten Street estimates. China’s government is pumping funds into its domestic infrastructure sector, directly sparking off demand for copper. Frequent, though unpredictable, strikes at Chile’s Antofagasta mine and at Peru’s 50 mines have also pushed prices up.
But, the game-changer is China’s policy to cut imports of low-grade copper scrap. China is planning a ban next year on imports of machinery waste, from which copper is extracted. The immediate impact is that supply would shrink. The move, which is likely to hurt imports of low-grade copper scrap, is aimed at reducing pollution. But the impact on overall supply may not be affected as smelters are buying higher-grade scrap. This also means that, with the ban on low-grade copper scrap, demand for high-grade copper scrap will increase. According to the Shanghai Metals Market, a Chinese metals information service, the ban will come in force from end-2018. SMM said that China imported around 1.2 million tonnes of copper scrap last year; this year such imports are likely to rise to 1.27 million. But, under the new rule, almost two-thirds would be cut.
China’s economy hints at early signs of recovery
The ups and down of China’s economy are the constant focus of global investors – especially those dealing with industrial metals. China’s GDP rose 6.9% in Q2, beating forecasts and putting the country on track to hit its growth target for the year. Industrial output in June rose 7.6%, boosting confidence in the country’s ability to push through economic reforms without denting growth. China’s economic expansion beat estimates. Better-than-forecast Chinese import-export figures, trade balance, GDP and industrial production signal early signs of revival in the economy. Chinese demand is not in bad shape. Better-than-expected monthly import-export figures means there is demand in the domestic market in infrastructure, real estate and the automobile industry. Also, other countries are buying from China. This should support base metals. Recently, the Asian Development Bank raised China’s growth forecast.
Copper inventories tracked by the ShFE have fallen to the year’s low
From around the last week of February 2017, inventories on the Shanghai Futures Exchange have fallen continuously, indicating strong demand for copper. According to the IMF’s latest monthly World Economic Outlook report, the global recovery looks robust, with good performances in emerging markets. Copper, being the most crucial industrial metal, is used in almost every aspect of life, from houses to cars to industrials to offices. China’s trade data suggest that, in the last three months, import-export activity has sped up.
To conclude China’s positive data might keep copper bulls supported. Although manufacturing PMI for July has come marginally lower at 51.4, it’s an expansion signal. China’s GDP points to an economic rebound in 2017. An unexpected strength in the country’s property market has kept growth buzzing. China grew 6.9% in Q1 and Q2, a slight rise from last year’s 6.7% expansion. If the trend continues, 2017 would be the first year that the country’s growth rate would surpass the preceding year since 2010. The pace of expansion of China’s retail sales and industrial production picked up remarkably in June. Factory output, a measure of strength in China’s core manufacturing sector, in June grew 7.6% from a year earlier, equalling a two-year high hit in March. Foreign trade has also provided an unexpected boost to its manufacturing sector and the trade balance has narrowed. Revival of China’s economy, points to a turnaround in demand for industrial metals. Strong macro-economic figures in China should keep the copper in demand for the rest of 2017.
Copper fundamentals are very upbeat. On the LME, for the year to date prices have risen 16%. A bullish international trend supports MCX prices. MCX copper has gone up by approx 17% since May 2017. Investors have flirted with Rs.415 many times. Hence, for long-term bullish confirmation, MCX copper has to close above Rs.415. On the upside, Rs.465 is a possible level. On the downside, 380 is a good support. Hence, we have a positive view on MCX copper.
(The writer is AVP commodities research at AnandRathi)
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