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TREND: Bulls take hint from China, bet big on copper despite risks

Tuesday, Dec 8, 2020

 

By Rituparna Ghosh

 

NEW DELHI – A pause, along with evaluation of future prospects, may seem the way forward after a price surge of 60% since March.

 

Not so for copper.

 

Commerzbank AG sees prices on the London Metal Exchange rising towards the $8,000-per-tn mark this year, while Goldman Sachs expects prices to hit $10,000 per tn by 2022, testing the record high of $10,170 per tn set in 2011. 

 

Currently, the three-month copper contract on the London bourse is at $7,725 per tn, and the December contract on the Multi Commodity Exchange of India at 593 rupees a kg.    

 

Strikes and unrest in major producing countries such as Chile and Peru, declining stockpiles on LME, and positive news on the development of a COVID-19 vaccine led copper prices to $7,799 per tn on Monday, the highest since 2013. Prices on MCX also hit a lifetime high of 597.3 rupees a kg on Friday. 

 

Hope of a sustained rally in copper through 2021 stems from the belief that there would be an even greater thrust on sustainability and climate-friendly policies in a post-pandemic world. This would mean governments prioritising renewable energy sources such as wind and solar power, electrification of energy transmission, and supporting electric vehicles for mass transport. 

 

China has already taken the lead, and is on course to boost its core industrial sector, as seen from the country's record high copper ore imports this year. Experts are convinced that it's a matter of 'when', and not 'if', other nations join the race, pushing copper prices even higher.

 

"This current price strength is not an irrational aberration, rather we view it as the first leg of a structural bull market in copper. Going into 2021, the copper market should face the tightest market conditions in a decade owing to a substantial deficit of 327,000 tn," Goldman Sachs said in a note. 

 

The record high copper stockpile accumulated by China this year suggests it is working on a five-year plan to expand its copper usage in the electric vehicle industry, urbanisation, green electrification, and healthcare. 

 

A few sceptics, however, say the red metal is already in overbought territory and will see a correction. 

 

Inflationary pressures, which force central banks to eventually squeeze out excess money supply infused into the markets, failure of a COVID-19 vaccine, rising infection rates, and geopolitical tensions are some key concerns of investors. 

 

"We believe the price of copper–and indeed of other metals–is also being driven up by a high level of speculative buying interest. From a technical perspective, copper is now overbought-the RSI (relative strength index) is at 80," said Daniel Briesemann, an analyst at Commerzbank AG. 

 

The relative strength index indicates whether a commodity is overbought or oversold in relation to recent price levels. The default time period is 14 days, with values bound between 0 and 100.

 

According to market participants, demand for copper is likely to remain strong if demand outside China also gains momentum. Though China's copper exports rose 6.9% on year to 617,838 tn during Jan-Oct, it was comparatively lower that its aluminium exports.

 

A senior trader with a Swiss trading firm said he didn't see any near-term risk to Chinese exports. However, if the US and the European Union joined Australia in a trade embargo to restrict import of Chinese goods, there could be a long-term impact on Chinese exports. 

 

Several countries have already joined hands for an international investigation into China's handling of the COVID-19 outbreak.

 

The trader with the Swiss firm further said that the course of international trade strategy towards China would become clear only after January, when Joe Biden takes charge as US president. While it is expected that the president-elect would be equally tough on China, there is belief that diplomacy and policymaking would be more predictable than under Donald Trump. 

 

With a keen eye on overtaking the US dollar's dominance in global copper prices, China began trading an international contract on the Shanghai International Energy Exchange in the yuan, its domestic currency. The contract is primarily designed for overseas traders to access the Chinese copper market. It involves no tax or customs duty and the underlying quantity will be delivered into bonded warehouses.

 

"China hopes that the copper contract will increase its pricing power for key commodities. What is more, it is intended to strengthen the role of the yuan," said Briesemann of Commerzbank AG. 

 

While Ravindra Rao, commodity research head at Kotak Securities Ltd, also termed the run-up in prices as "too much too soon", he believes the trajectory will remain upwards, even if there are intermittent bouts of correction.

 

On MCX, Rao sees copper prices rallying towards a fresh high of 602–605 rupees a kg by the end of this year, and up to 660 rupees in 2021. On LME, the near-term target is $7,900 per tn this year and up to $8,800 per tn in 2021.

 

While the bulls and the bears jostle to determine the trajectory of copper, global policies, especially towards China, will set the agenda.  End

 

US$1 = 73.73 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Subham Mitra

 

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