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Early this year, speculators swelled record spot positions in copper on the London Metal Exchange, driving prices to a three-year low in anticipation of a boost in output. However, together with a strong demand from the top buyer, China and a delay in processing of the ore into refined metal, limited further liquidation. Copper in MCX futures platform recorded a new high of Rs 512.70 a kg by the end of August due to a weak rupee but prices have corrected, giving up some of the gains.
China and the base metals
China is the top consumer of copper, accounting for 40 per cent of the world's total consumption. As the country consumes large volume of global base metals, developments in its economy and industrial growth would be a prime factor while determining global base metal prices. The current developments in the country are favouring strong demand outlook after the new Chinese leadership has set the state-led urbanisation projects as a priority sector for growth. According to industry sources, China is expected to import more copper in 2014 as the country steps up building of power networks, rail lines and low-cost homes. The recent economic releases from the country, too, are seen encouraging metal industry with the Chinese factory output hitting a 17-month high in August. Similarly, retail sales have grown at the fastest pace this year and power production has soared during August.
Aluminium prices may also gain with more building activity. China is anticipated to boost the demand of the commodity to tackle their enduring overcapacity in the industry. An approval of series of rail projects may enhance demand from the transport equipment makers. A recovery in the US and European economies provides firm support to aluminium prices as well. Expectations of moderate growth outlook in China, weakening optimism over their business outlook and struggling economic situations of European countries had earlier influenced the metal complex broadly.
On the other hand, the copper market has seen a large global surplus with 153,000 tonnes in the current year and an estimated 368,500 tonnes in the coming year, according to Reuter's poll. However, smelters assume that copper consumption in 2014 might rise by around five to six per cent and aluminium would climb by more than 10 per cent to about 24 million tonnes, supported by an improving global economy that could boost industrial metal consumption.
Warehouse inventories
Warehouse inventories of copper are seen cheering markets, with the stocks in the London Metal Exchange easing down to 5.17 million tonnes from its all-time high of 6.78 million tonnes, which indicates an improved consumption. Meanwhile, aluminium stocks in the London Metal Exchange warehouse are still placed at all-time highs. A similar trend was also witnessed with regards copper in Chinese bonded warehouses where stocks fell sharply during this year owing to a recovery in demand.
Looking ahead, improving pre-Christmas orders from China and encouraging global economic releases may favour sentiments while negative impact on the US economy due to the ongoing fiscal stand-off might influence prices later. On an investment angle, long positions in MCX Copper futures may be recommended when prices dip to Rs 430-425 levels for a likely target of more than Rs 500. In aluminium, the Rs 102-99 range would be a perfect entry for long positions.
The author is wholetime director, Geojit Comtrade
