Copper Conundrum
Fundamentals
Copper futures have shown some life to start the holiday shortened trading week, as strong buying interest in Shanghai due to a surprising increase in Chinese Copper imports last month has put a at least a temporary halt to the steep sell-off in the red metal. Chinese Copper imports were up 37.7% last month vs. October's totals. Analysts believe the increase was due to several factors, including possible restocking of reserves by the Chinese government and arbitrage between the Shanghai Futures Exchange and the London Metal Exchange (LME), but not from actual industrial demand, which has dampened traders' optimism for a sustained price rebound in early 2009. Copper producers are reacting to the sharp drop in prices by cutting production and shutting down mines, with the latest coming from Zambia's Luanshya Copper Mines, which announced it is closing all mines in that country due to low prices. Though production cuts bode well for higher Copper prices in the futures, currently the worldwide economic slowdown is taking center stage, and Copper supplies remain more than adequate to meet reduced worldwide demand. Copper supplies in LME warehouses continue to climb, with inventories rising by 3,200 metric tons on Monday to stand at 327,500 mt, which is an increase of nearly 50,000 tons since this time last month. Both large and small speculative accounts believe prices will continue to move lower, as the most recent Commitment of traders report shows non-commercial traders are holding a combined net-short position of 19,380 contracts as of 12/16/2008. The speculative short position may lend credence to the belief of Copper bulls that a short-covering rally is overdue, especially going into the end of the year. However, it will take a true pick-up in industrial demand to really set the stage for a rebound in Copper prices, and it remains to be seen whether the economic stimulus programs announced in China and the U.S. will be the catalyst for a rally or just another opportunity for Copper bears to add to winning short positions.
Technicals
Looking at the daily chart for March Copper, we notice the failure of the sharp run-up in prices on Monday tied to the Chinese imports report. Prices failed to move above the 20-day moving average and may signal that the move over $1.40 was due to illiquid conditions on Sunday's market re-opening. Also notice that volume has been declining the past week, as traders are reluctant to establish new positions ahead of the end of year holiday season. The 14-day RSI is showing a bit of a bullish divergence and may lend some bullish technical support. Support is seen at the recent lows of 1.2865, with resistance found at the 20-day moving average near 1.4830.
Mike Zarembski, Senior Commodity Analyst
