COPPER TODAY: Could return of China break $6,000/t?

Image
Short term: Up
Medium term: Up
Long term: Down
Resistances:
R1 4631 Apr low
R2 4750 Various highs from late-Dec 2015
R3 4935-4881 DTLs Feb/Aug 2011 highs
R4 5045 200 DMA
R5 5131 Mar 2016 high
R6 5356 Oct high
R7 5431 DTL from 2016 high
R8 5825 20 DMA
R9 6025.50 Nov 11 high
R10 6045.50 2016 high
R11 6294 Mar 2015 high
R12 6439-6481 May 2015 resistance band
Support:
S1 5825 20 DMA
S2 5728 40 DMA
S3 5460 Support/resistance Feb 2015/Sep 2015
S4 5360 15 Nov low
S5 5036 Long-term DTL Feb 2011
S6 5045 200 DMA
S7 4750 Various highs from late-December 2015
S8 4717 61.8% Fibo of 2001-2011 bull run
S9 4750 2016 YTD UTL
S10 4631 April dip
S11 4318 2016 low
Stochastics:
Bullish
Legend:
BB = Bollinger band
HSL = Horizontal support line
SL = Support line
MACD = Moving average convergence divergence
DTL = Downtrend line
H&S = Head-and-shoulder pattern
DMA = Daily moving average
WMA = Weekly moving average

Analysis

  • Copper prices remain firm and continue to test resistance around $6,000 per tonne.
  • Prices have been underpinned by rising support from the 20 DMA, which currently stands at $5,825 per tonne.
  • Additional support is expected from the 40 DMA, which currently stands at $5,728 per tonne.
  • The stochastics remain bullish for the moment, which suggests sentiment remains bullish.
  • Key resistance a is seen at $6,099 per tonne from the 200 WMA.
  • Clearace of which would enable a test to $6,320 per tonne, while another failed attempts risks forming a double top.

Macro drivers

Supply concerns are providing short-term price support. Workers at Escondida, the world’s largest copper mine, voted to go on strike. The strike could start on February 6, although the company’s request for government mediation may delay the start of any strike by up to between five and ten days. Exports from Freeport’s Grasberg mine in Indonesia remain suspended as negotiations for an export licence continue.

LME stocks have been gradually falling from a mid-December peak of 345,475 tonnes; they currently total 259,500 tonnes. The cash/three-month spread was last at $9 contango. A dominant warrant position holder has emerged, accounting for 40-49% of holdings. Cancelled warrants have risen; the proportion of stocks booked for removal stands at 40%.  However, longer-dated spreads have also tightened in recent days – the 3m-5y spread was last at $46 backwardation from just $4b a fortnight ago. This suggest some of the recent selling pressure could be producer related.

SHFE stocks at 212,925 tonnes are down from their peak of 394,777 tonnes from late in March.

Copper premiums were largely unchanged globally as the market slowed in China’s absence and higher exchange prices put consumers off buying physical metal.

China’s refined copper production rose by 6% year-on-year in 2016, to 8.43 million tonnes, and copper concentrate imports surged by 27% in the year, suggesting that further boosts to refined copper output are likely.

The latest data from the International Copper Study Group (ICSG) showed the refined market recorded a surplus of 48,000 tonnes in October, lowering the January-October 2016 deficit to 64,000 tonnes, compared with a deficit of 89,000 tonnes in the corresponding period of 2015. The ICSG forecasts the market to remain essentially balanced in 2016 and projects a modest surplus of around 160,000 tonnes in 2017. This compares with its forecasts in March for a deficit of 55,000 tonnes and a surplus of 20,000 tonnes for 2016 and 2017, respectively.

Conclusion

Copper has been buoyed by the threat of supply disruptions. Prices have been supported by rising price support but appear capped and continue to bump into strong resistance at $6,000 per tonne. But with LME warrants tightly held and cancelled warrants increasing, the market could be squeezed higher if supply disruptions emerge. We wonder whether the return of Chinese players tomorrow may be the catalyst for an upside break.

 

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.