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UTI Mutual Fund

Over the past eleven months, Comex copper prices have been running strong while LME Copper prices rallied more than 80% and MCX crude rose 84%, since 1stApril 2020. This run has been mainly supported by factors such as global stimulus packages, mine supply disruptions and a weaker Dollar.

Going forward, we expect 2021 to be another good year for copper due to optimism over a global economic recovery, as the vaccine roll-out has begun in several developed economies. Other factors that will drive copper are

  • Hopes of an additional stimulus package in the US and around the globe
  • Biden clean energy policies (Electric Vehicles)
  • Lower inventory due to Post Covid Demand recovery and shortages in Chile and Peru
  • A Weaker Dollar
  • Copper-Aluminum Ratio suggests that copper prices will stay strong

Monetary stimulus by the Fed and other global central banks

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

Source: Trading economics, Ventura Securities Ltd

While the Bank of Japan (BOJ) increased its balance sheet by a whopping 29% in 2020, the US Fed’s balance spiked above $7.34 trillion in Feb 2021, an increase of roughly 76% 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 incentivize electric vehicle sales and invest in charging infrastructure. In fact, 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 which includes investment in high-speed rail, as 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 in over nine years on the back of tight supplies and a bullish sentiment towards base metals post the Chinese New Year.

The Corona virus lockdowns have meant many consumers who in previous times would have spent money on holidays, restaurants and other leisure activities are now choosing to buy electrical appliances and durable goods.

China accounts for about half of global consumption. Much of this is for goods that are shipped to other countries, as can be seen in China's exports of refrigerators going up 45% in December from a year earlier and microwave oven exports increasing 35%.

Source: Trading economics, Ventura Securities Ltd

US Purchasing Managers’ Index (PMI), which is currently at 58.50, it suggests bullish manufacturing trends in the country and this translates into greater demand for copper. Further, there has been a pick-up in demand for new home and home renovation in the US since the pandemic started, along with electronics demand. This will lead to 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 by around 0.5% in the first ten months of CY 2020. Copper concentrate supply was disrupted due to the Covid-19 pandemic and aggravated by operational issues/adverse weather that affected a few major mines in Peru, Australia, Mexico and the United States. In Chile, the world’s biggest copper mine producing country, output in the first 10 months of 2020 remained essentially unchanged.

World refined copper balance in the first ten months of 2020 indicates an apparent deficit of about 480 thousand tonnes due to a strong Chinese demand. Chinese apparent usage increased by 14%, offsetting usage declines in other regions of the world. The higher demand and supply crunch also led to a sharp fall in inventory levels, which lent further support to 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% and further fueled concerns about a tight supply on the LME market.

Source: Tele quote, Ventura securities Ltd

Backwardation suggests demand boom

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

Weaker Dollar index will support the copper price

There’s normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher. This is a general rule and the correlation isn’t perfect, but there’s often a significant inverse relationship which plays out over time.

Source: Tele quote, Ventura securities Ltd

The table above suggests that copper outperformed the Dollar index between July 2020 and Feb 2021, demonstrating an inverse correlated with it. Moving forward, any further weakness in the Dollar index in the coming days may once again support a rise in copper prices.

Copper to aluminum suggests that copper prices may stay strong

The Copper-Aluminum ratio monthly chart presents how the demand for copper has increased over the past ten-month period and is expected to outperform in the coming months/quarters.

Technically, we expect the ratio to head towards 4.20 levels approximately over the next one to three months (the previous high was made on Dec 2013). Going forward, the ratio could face strong resistance at these levels and from there we expect to see a reversal trend. However, if it breaks above these levels,the price of copper could enter the next leg of the rally and head towards 4.50 over a three to six months period.On the down side, it will take strong support at 3.68 levels.

Source: Ticker plant, Ventura securities Ltd

Technical outlook

Technically, LME copper prices are looking good on the monthly charts and we can expect a strong uptrend as they march towards 10200 in the coming months (previous high made on Feb 2011).If the price breaks above those levels it could head towards 12000 to 12500 levels over the next one-year period.  The momentum indicator, RSI, is trading in the overbought zone and a short-term correction is on the cards. On the downside, LME Copper prices will take strong support at 8200 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.

Source: Telequote, Ventura securities Ltd

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

Source: Ticker plant, Ventura securities Ltd

Note: Any further appreciation /depreciation of the Rupee against the Dollar may impact the price of MCX Copper.

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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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