Copper : Buy or Break ?

Base metals movements continue to be directed by global macroeconomic events such as developments in the euro zone debt crisis, US economic data and Chinese monetary policy. Chinese government fight against rising inflation remains in focus throughout the month and quarter which remained negative for metals prices. US economic data painted gloomy picture raised the doubts on recovery while in the last the Greek parliament approved detailed austerity and privatization bills to secure emergency funds and avert imminent bankruptcy.

In the month of June, LME metal counter witnessed range bound movement with more on negative bias however recovered at the end on Greece’s positive news. Copper reached above $9400 on technical triangle break out which spurred the buying in metal, finishing at $9430 with monthly gain of two percent while on quarterly basis it ends in break even zone. Stainless steel material, nickel was the only loser in metal complex, settled with more than 10 percent loss in second quarter on weak fundamentals however it was the only metals which stocks decrease by more than 15 percent in the same period. Battery material Lead, managed to settle near $2700 with more than 6 percent gain in last month on persistent environmental issues in China over lead poisoning. Zinc prices also followed lead rally and end at $2365, with four percent gain; however both metals ended with no gain-no pain in last quarter.

COPPER

Copper price continue to be directed by global macroeconomic events such as developments in the euro zone debt crisis, US economic data and Chinese monetary policy. Copper prices are still far away from its life time high of $10190 as few factors contributing to the retreat including Chinese monetary move to tighten monetary policy, lackluster US economic numbers suggesting a stalling recovery and growing concerns over the financial instability in the Euro zone. Market movements remained muted on lack of fresh fundamentals which insisted LME copper to trade between $8700 to $9300. Fundamentals remain unchanged as supply shortage still there in the market. So, which factors will determine the upcoming trend in prices? Many factors affect the price such as US economic outlook, China’s credit environment, Euro zone’s financial stability, demand from emerging nations and last but not the least is supply scenario.

Considering Budget deficit, a lingering dilemma for US economy, apart from the deficit there has been a consistent stream of data suggesting that the economic recovery is losing momentum. Sluggish manufacturing numbers, poor job data, tumbling housing starts, lackluster consumer spending and poor consumer confidence have pained a gloomy picture of the US economy.

Another concern is China’s credit environment as to control the rising inflation, China raised reserve requirement ratio to 21.5 percent, sixth times such increase this year to tame the inflation which reached to 5.5 percent at 34 month high. Euro zone financial instability remained the vital factor to direct the price however Greek parliament passed the austerity plan.

Demand from emerging nations such as China, India, Korea, Indonesia and more grew and expected to grow further very well due to rapid development in end-use sectors such as telecommunications, power, equipment manufacturing, automobiles, construction and consumer goods.

So, overall after studying above factors we expect copper to remain positive in the coming period. Supply shortage in the next year and expecting improvement in demand may push copper prices to trade near $9800 in the next month. Technically, copper has strong support at $9000 and $8700 while resistance lies at $9800. MCX Copper price is expected to trade positive for the next month with target range of 440-450 and support at 400.

NICKEL

Price of nickel has been rising since 2005 on the back of emerging market demand with London nickel price reached above $29000/tonne to a three year high in February. However since then prices have tumbled more than 25 percent and have become the worst performer on LME. Prices fell towards $21,650/tonne in last month, settled at $22,500 with more than 5 percent loss. 

Demand from the emerging markets remained positive and since 2005 increased demand from China, Brazil and other developing markets has driven the nickel demand high and at that time miners couldn’t keep the supply with demand. Construction delays, technology setbacks and higher manpower costs have kept global nickel production stagnant from 2008-2010. During that period, lower supply could not catch up the rising demand resulted in boosted for nickel prices. But then after supply has increased and sufficiently catch up the demand because after years of delays several new mines have come online. During the start of the year, Vale and Anglo American launched production at new sites, while Xstrata plans to start production in New Caledonia next year. In fact, Vale is so optimistic about its new projects that it has projected a 56 percent increase in nickel output this year alone. Where, more than half of this supply comes from China as this year china boosted output of pig iron by 48 percent. Indeed, Macquarie research project that global nickel mine production should rise 10.1 percent this year, and 11.3 percent in 2012- the biggest increase in 17 years.

It’s not a surprise that nickel market will turn to surplus from deficit in nest year as International Nickel Study Group has predicted a massive nickel surplus. In April, it projected the 2011 nickel market would see a surplus of 60,000 tonnes, compared with last year’s 30,000 tonne deficit, which would be the highest surplus in four years.

Now question arise, how to play nickel? Does it have much further to fall or potential to recover?  Fundamentally, supply side is stronger than demand which could dampen sentiments; however demand from western economies and stainless steel demand from Japanese automakers are expected to recover which may limit the further downside in nickel prices. So, overall we don’t expect prices to remain strongly bullish but stability around $22000 is expected in the next month. MCX Nickel prices are expected to trade between 1000-1100 in next month.

LEAD & ZINC

Environmental issues have always affected Lead industry, especially in recent time persistent efforts from China to control pollution over concerns of lead poisoning. China is a largest producer of metal and the country has large amount of such plants. Recently, China is administering shutdowns of such plants due to rising cases of lead poisoning and in late May the Chinese government shut down lead battery and lead recycling plants. These shutdowns may decrease the demand from plants however this could also raise the problem of supply as supply of refined lead may reduce which may bring fundamental back into balance even might initiate a turnabout in prices of lead. China’s top planning ministry, the National Development and Reform Commission plans to close down 585,500 tonnes of lead smelting capacity this year as part of a wider crackdown on 18 heavy and polluting industries. If the closures will be longer at the large facilities the impact will be deeper on lead demand. However, not major impact is projected on lead demand in short term due to higher stocks at warehouses and large surplus but it definitely affects the supply of refined lead in long term.

Modest recovery seen in Zinc price on macroeconomic developments as at the end positive news from euro zone spurred the sentiments. LME Zinc traded in a narrow range throughout the month on lack of fresh fundamentals, however it settled near $2350/tonne, up by nearly 4 percent from previous settlement. Concerns about the slower growth in China and Western nations are impacting on zinc demand as it is highly correlated with industrial production. Due to power issues in China smelters are starting to cut production and margins get squeeze due to lower price. Power shortages and government enforced closures may slow the output growth.

In the next month we expect some improvement in lead prices where resistance lies at $2900 and support at $2400. MCX lead prices may trade near 125 level in next month. Zinc facing resistance at $2500 and support lies at $2150. Prices are expected to consolidate at current levels where MCX Zinc price may see level on 112 on upper side and 100 at bottom side.