Weekly Copper Price Outlook and Strategy

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1 Decision enabling cash market analysis & price outlook Feb 02, 2015 Market Recap and Summary Outlook for next 2 weeks LME Copper, during the past week, traded in a mixed range and closed slightly negative for the week amidst weak Chinese industrial profits indicating sluggish domestic demand and risk aversion to the concerns of fallout in the Euro area as the Greek government will largely be under control of the leftist party Syriza, increasing the risk over Greece s exit from the euro zone. However, sharp short covering rally in crude oil prices that led to profit taking in Copper as well from its five and half year lows arrested the downside. US economic growth slowed to 2.6% in Q4, but remained at a renewed 4 year high last year keeping the investor confidence in the demand outlook for industrial metals intact and thereby supporting the prices. Going ahead in the next couple of weeks, Copper will be supported by the rally in Shanghai prices amidst hopes of stimulus measures from China after the weak manufacturing PMI numbers. However, the weak Chinese numbers indicating the sluggish demand in the factory sector for metals and gradual surge in exchange inventory will keep the prices under pressure capping the upside. Key factors driving prices in the coming weeks are: Global growth outlook and weak Chinese manufacturing and industrial sectors Deflation concerns across the globe amid low commodity prices Increasing concerns of supply overhang amid record high Chinese production Resumption of trend in refined copper imports by China Expectations of stimulus measures from China and ECB s QE Report Summary LME / SHFE / MCX on Jan 30, 2015 Price Outlook Summary Price Range for coming 2 3 weeks Turnaround point LME 3M: USD ( 0.49%) SHFE 3M: CNY ( 4.16%) MCX Feb 15: INR (+0.44%) Concisely, prices are likely to hold support of USD 5300 and witness a corrective bounce towards USD in coming 2 weeks before retesting USD 5500 zone. Range Price Bias Mixed Sustainable close below USD 5300 would negate immediate bounce and pull market towards USD 4800 in subsequent 4 6 weeks. Fundamental analytics In the macro economic front, over the weekend, China reported the factory sector shrank in January for the first time in more than two years as the manufacturing PMI came in at 49.8, down from 50.1 in December. HSBC PMI as well was reported at 49.7 indicating contraction in the factory sector. Chinese manufacturing companies slowed production due to seasonal factors, such as the New Year holiday and the upcoming Chinese New Year holiday while continued declines in commodity prices leading to widened factory gate deflation put a dent in Discuss with our expert Phone: E mail: services@transgraph.com Internet:

2 production augmenting the slowdown in the sector. However, Shanghai Copper rose by more than 2% on Monday s trade amidst expectations of stimulus measures from China after the downbeat numbers. In the FOMC statement officials have spoke about the solidity in the US economy while although maintaining that FED will be patient before changing its monetary stance and should the data be encouraging, FED will increase interest rates sooner than anticipated. This has led to sharp appreciation in the dollar while stocks and yields have plummeted down that was spilled over into the LME Copper prices. The euro zone s January CPI fell 0.6% YoY, a decline bigger than the expected 0.5% and level with the record low. This indicates that the single currency area is now confronted with worsening deflation amidst lower crude oil prices. However, Germany s retail sales posted the highest growth in two and a half years in December, while Spain s retail sales and France s consumer spending both exceeded expectations keeping the investor sentiment intact while ECB continues to push money into the market through QE. Earlier, European Central Bank (ECB) announced at its rate meeting that it will buy 60 billion Euros worth of sovereign bonds per month until September This round of quantitative easing (QE) will span 19 months and amount to 1.14 trillion Euros. The larger than expected QE scale led to sharp depreciation in Euro against the greenback. Although QE is expected to support the riskier asset classes including metals in the medium term, a strong dollar has pressured the prices. Over the coming month, with Chinese Lunar New Year holidays starting from Feb 17 th, restocking activity from China shall add support to the prices on any decline in the near term. Fundamental Overview Chinese Copper Imports (KT) Refined Copper Arbitrage (Changjiang LME),RHS Jan 14 Feb 14Mar 14Apr 14May 14Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14Dec Chinese unwrought copper imports continued to witness stable increase with YTD imports from January to December clocking in at 4.83 million tons up 7.4 % YoY. Earlier, Qingdao port probe has led to fears of crackdown on commodity financing hurting the imports of refined Copper during June September period. However, imports have picked up gradually as the probe in June has not yielded major evidence that would have led to financing crisis and liquidation in the private bonded warehouse stocks into the market. Further, China has put in place an export tax rebate of 9% for 2

3 copper bars, rods and profiles at the beginning of 2015, while increasing the export tax rebate for copper foils to 17% from 13%. The new rebate is expected to push up exports from downstream units is expected to push up the import demand for refined Copper. Overall, apparent demand for refined Copper in China is likely to remain strong going ahead despite slowdown in the economy. Meanwhile, Copper prices continue to remain under pressure amid mounting expectations of supply overhang in the refined market while uncertainties over Chinese real demand outlook keep the investor cautious. China continued to produce record high numbers of refined Copper amid abundant supplies of concentrates. Chinese industry ministry has said that refined copper production rose 13.8% to 7.96 million tons in In the final quarter alone the production has rose by close to 22% with December s production at 833 thousand tons. At the global supply demand balance front, however, ICSG reported that world refined copper market remained in a deficit of 616 thousand tons during Jan Oct 2014 compared to a deficit of 159 thousand tons during Jan Oct Including Chinese bonded stock change, the deficit stood at 675 thousand tons. For the year 2014, with the physical market activity remaining steady, the balance is estimated to have improved to a deficit of 321 thousand tons, similar to that witnessed during While the overall talk of a supply overhang has been in place for more than a year now, the data being reported does not show any such surplus. Market estimates of 94 thousand tons surplus in 2014 too is yet to be supported by ICSG data. Also, a Reuters poll showed that the analyst expect, in 2015, the global refined Copper surplus to shrink to 221,000 tons from their previous forecast of 350 thousand tons mainly due to the capacity curtailments in mine production after the prices decline and technical reasons as well. Further, cuts in Copper mine output across the globe are raising doubts about the extent of the expected surplus. While several mining companies cutting their 2015 output estimates due to geological or technical reasons, with prices falling sharply over the past weeks, possibility of more cuts to emerge in the coming month remain open if the current sell off is sustained. Such an event could lead to waning of the surplus expectations and could create deficit for Concisely, while it is possible for output cuts to be announced over the coming month, the price trigger for such action could be below USD 5000 than at current levels. Hence, the current surplus expectations are likely to put prices under pressure in the short term unless a significant output cut is announced to wipe out the expected surplus. A total cut of around 420 KT has been announced as on date by four major producers, as depicted in the table. Company Mine Location Cutback announced (KT) Rio Tinto Kennecott US 100 BHP Billiton Escondida Chile 150 Glencore Alumbrera Argentina 50 Barrick Gold Lumwana Zambia 120 Stocks at LME warehouses have increased by more than 78 thousand tons since start of December 2014 to more than 248 thousand tons while cancelled warrants have remained flat at around 23 thousand tons. Stocks at SHFE warehouses also have increased in the past few weeks. Since start of Dec 2014, stocks have increased from 89 thousand tons to 137 thousand tons while on warrant 3

4 stocks have increased from 16 thousand tons to 42 thousand tons. Overall, the gradual inventory buildup at the exchange warehouses amidst continuous increase in Chinese refined production to record highs is likely to keep the prices pressured in the medium term. However, from a bigger picture, the current inventories remain only 3.6 days of consumption indicating the short term improvement in exchange inventories may not be a completely bearish indication for prices in the medium term. Concisely, increasing growth concerns and extended weakness in crude oil prices coupled with a strong dollar is likely to keep downside pressure on Copper prices in the coming weeks. However, cutbacks in supply and possibility of further easing measures from China and restocking demand ahead of Lunar New Year holidays is likely to support prices on any decline and lead to recovery over the coming month. Technical view on LME Copper 3 Month Forward A. Chart Analysis: LME Copper 3 Month forward prices witnessed both sided action making a near perfect Doji indicating potential short term bottom is placed and prices are likely to witness further rise towards USD 6000 in coming weeks. After retracing from USD 7200 during last 7 months, prices witnessed relatively range bound and time taking fall towards USD 5340 zone before witnessing a minor bounce during last session. High volume penetration of USD 5400 zone followed by a sharp bounce indicated that USD 5300 zone acts as a strong accumulation level. Momentum indicator studies like RSI and Stochastics are turning up from oversold zone indicating weakness has saturated and a reactive rally will lead market towards USD 5950 zone before consolidation. 4

5 On Downside, USD zone acts as immediate support. Prices are expected to hold this support and bounce back towards USD 6000 before another leg of weakness. Break below this level would turn medium term sentiment weak and take market towards USD 4800 in coming month. However, this possibility is remote. On upside, USD 6000 zone acts as strong resistance. However, only break above USD 6400 with high volume would negate possibility of immediate weakness thereafter and extend current corrective gains towards USD 7600 in subsequent quarter. This possibility is also very remote in current technical and momentum picture. B. Sentiments: Options Volatility: LME copper options IV curve witnessed sharp rise followed by defragmentation at the top indicating potential bottom is near and option market participants are not in harmony with current fall. IV curve also negated previous backwardation and turned into contango supporting above view. C. Sentiments: CFTC COTR : CFTC Commitment of Traders Report (COTR) is indicating mixed picture. Open interest sharply raised during last 8 weeks along with speculative short positions while speculative longs are flat. However, since last 2 weeks, open interest along with speculative positions are falling in synchronized manner 5

6 indicating long term bottom is near in 2 3 weeks. This heavy accumulation of short positions is indicating a short covering rally in 2 3 weeks. Speculative short positions are just above a level (>40%) where major reversals begin. Concisely, prices are likely to hold support of USD 5300 and witness a corrective bounce towards USD in coming 2 weeks before retesting USD 5500 zone. Facts and Figures digest Market and details 30 Jan Jan 15 Change %Change LME Copper Cash (USD/Ton) LME Copper 3M Forward (USD/Ton) LME Copper 15M Forward (USD/Ton) LME Copper 27M Forward (USD/Ton) Changjiang Spot Prices (CNY/Ton) SHFE 3M Futures (CNY/Ton) Stocks LME (Tons)* Stocks SHFE (Tons) MCX Feb 15 Futures MCX Apr 15 Futures LME Copper Futures Open Interest * LME Copper Call Option Open Interest * LME Copper Put Option Open Interest * *LME releases stocks data, for the prior day, a day later by 09:00 hrs (London Time) 6

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