Demand optimism, tight supply likely to lift copper higher

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Copper prices in Indian futures market have doubled since March 2020. The widely used industrial metal has got a boost from rapidly tightening physical markets, optimism over global economic growth and hopes that the long era of low inflation in key economies may come to an end soon.

On the domestic futures platform, prices hit a life-time high of Rs 745.50 a kg in February, gaining more than 25 percent in the first two months of the year. The benchmark LME prices and the key Shanghai futures prices also surged to more than a nine-year high on firm fundamentals.

Apprehensions over supply-demand mismatch led the sentiment higher. Increased demand driven by a swift global economic recovery has raised concerns over a historic deficit in base metals supplies. The post-pandemic demand reinforced speculation about a new commodity super cycle. Meanwhile, the base metal’s recent sharp recovery marks a turnaround from previous months. Copper hit turbulence as investors signalled the need for more fiscal stimulus and worries over demand from China.

China’s appetite for the metal has a big influence on the commodity. China’s swift turnaround from the negative impact of the coronavirus pandemic ahead of other major economics brightened the demand for industrial metals. In 2020, China was the only major economy to report positive annual growth, with an expansion of 2.3 percent.

China reported a better-than-expected factory and retail sector activity in the first two months of 2021. As per the data from the China National Bureau of Statistics, the industrial output rose 35.1 percent in the first two months from a year earlier. Likewise, retail sales increased 33.8 percent against a 20.5 percent contraction in January-February of 2020.

Supply conditions of copper are the tightest in years in many areas of the key physical market. Shrinking profit margins for processing raw ore into refined metal in top consumer China was a key reason for supply shortage. There are also reports that many suppliers are  considering cutting output as refining margins have slumped to 2012 lows.

However, China’s refined copper output for January and February rose 12.3 percent year-on-year to 1.63 million tonnes. As per the international Copper Study Group, for the first 11 months of 2020, the 24 million tonne global refined copper market was in a 5,89,000 tonne deficit compared with a 4,27,000 tonne deficit in the same period the previous year.

Looking ahead, copper is taking another step closer to a new all-time high as investors bet that supply tightness will increase in a world recovering from the pandemic.

 Investors may bet on copper on hopes that demand will surge in coming years on expectations that the need for huge volumes of raw materials after the unprecedented fiscal stimulus measures taken by various governments.

However, a strong US dollar and a possible surge in supply from key producers may limit the upside.

On LME, if prices clear the recent consolidation resistance of $9,620 a tonne, it may extend the bullish wave towards $11,500 or more levels. A direct break of $7,600 is an immediate downside turnaround point. On MCX, as long as Rs 620 hold the downside, we can expect rallies to continue in the near future. However, there are chances for liquidation pressure if copper closes below Rs 580 a kg.

Article first published in moneycontrol.com

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