Copper Analysis: Flying Days Are Over — Time to Glide?

Jul 14, 2021 02:12 PM ET
Copper Analysis: Flying Days Are Over — Time to Glide?
  • Uptake by China is likely to reduce as economic activity cools.
  • China has also intervened by auctioning metal reserves.
  • Covid-19 and the value of the dollar also affect prices.

Copper showed strong intent to keep rising as markets remained vigilant over a possible resurgence in Covid-19 cases amidst renewed concerns over the Delta variant. The brown metal gained marginally in early Monday trading, at the Shanghai market, with the same performance reflected at the London Metal Exchange.

Copper's three-month contracts were up by about 1.7% on Friday, closing the day at $9,493 per metric tonne. The commodity opened at $9,475.50  in LME and $10,690 per metric tonne in Shanghai on Monday. This comes following China's June's consumer inflation data that showed that inflation reduced marginally.

Slowing economic productivity and supply interventions in China

Last week, China signaled that its economic activity is likely to have slowed down following its easing of the monetary policy. The policy, which decreases the reserve requirement ratio for banks in the country, was interpreted as a move to spur a slowing economy. 

This seems to support the reduced rate of consumption of copper by country in June. According to the country's National Bureau of Statistics, its manufacturing PMI declined from 51.0 in May to 50.9 in June.

The news came following an earlier intervention by the Chinese Government in mid-June in its effort to curb the base metal prices. The state released 20k tonnes of copper, 50k tonnes of aluminum, and 30k tonnes of zinc from its reserves.

That move evidently didn't lower the prices as much as they had hoped. Consequently, in a follow-up move, Chinese authorities announced on July 7th that they would be auctioning more base metals. This is likely to put more pressure on copper prices.

Covid-19 still an existential threat but possibly manageable

It's not all gloom for copper, considering that China, the world's largest consumer of the commodity, has done commendably well in its efforts to contain the spread of Covid-19. This is likely to keep demand from Chinese factories stable in the short term.

However, being a net exporter also means that demand for finished products will ultimately determine factory activities. Therefore, the management of the Delta variant elsewhere around the world will influence China's importation of copper.

Despite its strong show, copper is still some way off the ATH of $10,747 recorded in May, as demand from China dissipates. The spread of the Covid-19 Delta variant to many countries has also reduced the enthusiasm that spurred the commodity to historic highs as factory demand surged in May.

Such concerns are likely to reduce demand in emerging markets, which incidentally have the lowest vaccination levels. This may diminish prospects of increased factory demand.

Copper is also likely to take a hit from a potentially widespread reduction of central bank liquidity globally. So far, copper prices have benefitted from falling US Treasury yields and a strong stock market. 

This is evidence of a rising affinity for risk among investors. In addition, after its recent gains that saw it reach a three-month high, the USD has shown signs of a decline. If this is maintained, the demand for copper and other dollar-denominated currencies could grow.

Technical outlook

At the time of writing, copper was trading at $4.2905.  Its daily MACD is trending just slightly above the signal line and looks to be heading sideways, thus making it a mostly neutral signal. The metal is likely to find first support at $4.2385 and the second support at $4.0935.

Copper futures

Any price gains are likely to be marginal, with the first resistance may be encountered at $4.3425. Beyond that point, copper may attempt to reach the second resistance at $4.4850.

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