Copper: The Rally Continues As Supply Disruptions Worsen
Copper prices surged higher yet again this week hitting their highest levels since 2014 as supply factors and USD weakness contributed to increased demand for the red metal. Midweek, Freeport McMoRan reported that flash floods at their Grasberg site in Indonesia had wrecked roads, bridges, and water lines – sadly, one worker has also been reported missing. The group has yet to quantify the impact on operations, but a spokesperson for the group stated that it is likely that the main processing mill will have been affected. The Grasberg site has been a continual problem for the group with a four-month strike extending there as well as the group’s renewal of its temporary exporting license coming due in October.
Alongside the supply disruptions in Indonesia, Zambia, the top African copper producer, reported reduced power supply to sites operated by Glencore and First Quantum Minerals, linked to a pricing dispute. Glencore’s site at Mopani has been taken completely offline while the impact on FQM appears limited so far. Supply disruptions have plagued copper producers this year and last month, Chile’s Antofagasta only just avoided a worker’s strike at the Zaldivar and Centinela sites. The market is cautious about the potential for strikes in Chile as the nation is responsible for producing around 30% of the global copper supply.
In addition to supply disruption, the weakened US Dollar has also been providing a boost for the red metal as the minutes of the latest FOMC meeting highlighted the Fed’s concern about the inflation outlook and further weighed on market’s expectations of a further rate rise this year.
Given the current backdrop, investors have been quickly building their long exposure. The latest CFTC data shows that hedge funds’ long positions reached record highs last week with capital managers now long over 112,000 lots (roughly 2.8bln pounds). Copper is now up around 18% on the year and looks set to continue higher.
The rally in copper this week saw price poking above the 2015 high at 2.956, to hit its highest level since 2014. This is key resistance for the metal and a sustained break of this level will be needed to maintain bullish momentum. The next key support will be a retest of the prior 2017 high around 2.752. To the topside, the next key resistance will be the mid 2014 swing high around 3.274.
Iron: Cooling Steel Prices Weigh on Iron
Iron ore prices suffered a correction lower this week after a sharp, steady rally over recent weeks. Weakness in Chinese steel prices is responsible for weighing on the metal which recovered to a peak of roughly $77 before falling back. Steel production has started to ease in China, following a sharp ramp up in response to news of illegal capacity cuts by Chinese officials. Some industry analysts are now warning against a further drop in prices pointing to the high level of inventory in Chinese ports.
Adding further downside pressure was a raft of weaker data out of China this week with Industrial output, investment and consumption all having slowed. Speculative buying has been a large supporting factor for this rally but cautious views over a changing fundamental landscape could see some players exiting their positions.
The recovery rally in Iron has so far made it back up to the December 2016 lows round $77 where price found resistance and turned lower. For now, however, focus remains on further upside and players are likely to use the dip as an opportunity to reload positions for a renewed run to the upside. The next key support for Iron is back at the $70 mark where price broke out above the May swing high earlier this year.
By James Harte, Orbex
With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.