Copper Rally All Set To Continue In 2021

Over the past eleven months, copper prices on Commodities Exchanges (COMEX) have been running strong while that at the London Metal Exchange (LME) rallied more than 80 per cent.  At MCX, crude rose 84 per cent since 1^st April 2020. This run has been mainly supported by global stimulus packages, mine supply disruptions and a weaker Dollar.

Going forward, we expect 2021 to be another good year for copper. The expectation is fueled by optimism over a global economic recovery as vaccine roll-out programmes have begun in several developed economies. Other factors that are expected to drive copper are:

• Hopes of an additional stimulus package in the US and around the globe
• Joe Biden's clean energy policies, including electric vehicles
• Lower inventory due to post-Covid demand recovery and shortages in Chile and Peru
• A weaker Dollar
• Copper-Aluminium Ratio suggests copper prices will stay strong

Monetary stimulus by the Fed and other global central banks

Data suggests copper prices have recovered from the trough of early 2020, mainly supported by Federal monetary policies and global fiscal stimuli.

While the Bank of Japan (BOJ) increased its balance sheet by a whopping 29 per cent in 2020, the US Fed's balance spiked above $7.34 trillion in February 2021, an increase of about 76 per cent since the pandemic began.

The Central banks of major economies, such as the US, the EU and Japan, have begun expanding their balance sheets by buying assets to inject liquidity into the market. This is likely to keep copper prices buoyant.

Clean energy policies will increase copper demand

Biden has pledged approximately $400 billion towards clean energy innovation and investment over the next ten years as part of an overall $1.7 trillion climate plan. We expect the US to incentivise electric vehicle sales and invest in charging infrastructure. The Biden administration is committed to increasing cash incentives for switching to electric vehicles, similar to the 2009 "Cash for Clunkers" program. We also expect a potential green stimulus plan that includes investment in high-speed rail. Biden has been a supporter of this medium of transport. If this goes through, it will increase the demand for base metals and copper demand over the longer term.

Post-Covid demand recovery from China

Copper recently jumped to its highest level over nine years on the back of tight supplies and a bullish sentiment towards base metals post the Chinese New Year.

The Coronavirus lockdowns have propelled consumers to spend on electrical appliances and durable goods instead of spending on holidays, restaurants, and other leisure activities.

China accounts for about half of global consumption. Much of this is for goods shipped to other countries. This can be seen from a 45% rise in China's exports of refrigerators and a 35 per cent rise in microwave ovens in December against the previous corresponding period.

US Purchasing Managers' Index (PMI), currently at 58.50, indicates bullish manufacturing trends in the country. It translates into greater demand for copper. There has been a pick-up in demand for new homes and home renovation in the US since the pandemic. This will lead to a derived demand for copper.

Lower inventory and mine supply disruptions

According to recent data released by the International Copper Study Group (ICSG), world copper mine production fell 0.5 per cent in the first ten months of 2020. Copper concentrate supply was disrupted due to the pandemic and aggravated by operational issues.  Adverse weather affected a few major mines in Peru, Australia, Mexico and the United States. Chile, the world's biggest copper mine producing country, saw output remain stagnant in the first 10 months of 2020.

World refined copper balance in the first ten months of 2020 indicates an apparent deficit of about 480 thousand tonnes due to strong Chinese demand. Chinese usage increased by 14 per cent, offsetting usage declines in other regions of the world. Higher demand and supply crunch also led to a sharp fall in inventory levels, which further supported copper prices.

Inventories of copper in warehouses registered with the LME are near 2005 lows at 75,700 tonnes. Cancelled warrants – metal earmarked for delivery – account for about 39 per cent and further fuelled concerns about a tight supply on the LME market.

Backwardation suggests demand boom

There are already signs of emerging tightness on the LME, as spot contracts trade at a premium to futures. The pattern, known as backwardation, was a feature during a record-breaking boom in Chinese demand last year. It suggests that spot demand is once again outpacing supply as exchange inventories run low.

A weaker dollar index will support the copper price

There's usually an inverse relationship between the value of the dollar and commodity prices. Historically commodity prices have dropped when the dollar strengthens against other major currencies and ice-versa. This is a general rule, and the correlation isn't perfect. Still, there's often a significant inverse relationship that plays out over time.

Copper has outperformed the Dollar index between July 2020 and Feb 2021, demonstrating an inverse correlation. Moving forward, any further weakness in the Dollar index in the coming days may once again support a rise in copper prices.

Copper-Aluminium Ratio suggests copper prices may stay strong

The Copper-Aluminium Ratio suggests how copper demand has increased over the past ten-month period and is expected to outperform in the coming months or quarters.

Technically, we expect the ratio to head towards 4.20 levels approximately over the next one to three months against the previous high achieved in December 2013. The ratio could face strong resistance at these levels, and from there, we expect to see a reversal in trend. However, if it breaks above these levels, copper prices could enter the next leg of the rally and move towards 4.50 over three to six months. On the downside, it will take strong support at 3.68 levels.

Technical outlook

Technically, LME copper prices are looking good on the monthly charts. We can expect a strong uptrend as they march towards $10,200 per tonne in the coming months against the previous high made in February 2011. If the price breaks above these levels, it could head towards $12,000 to $12,500 over the next one-year period.  The momentum indicator, Relative Strength Index (RSI), is trading in the overbought zone. A short-term correction is on the cards. On the downside, LME Copper prices will take strong support at $8,200 levels, breaking below which, we can expect a change in the price trend in the short term. The overall trend for copper is clearly upwards.

On the MCX, Copper price is expected to head towards Rs 660 to Rs 675 per Kg over the next one to three months. It could climb towards Rs 900 to Rs 950 per Kg over the next six months to one year period. On the downside, it will take immediate support at Rs 630 levels, and breaking below which the price could drag down towards ₹ 580 a Kg in the medium-term.

Any further appreciation or depreciation of the Indian Rupee against the US Dollar may impact MCX Copper price.

The author is Head of Commodities, Ventura Securities Ltd

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.