Red metal weakened in May after reaching to 18 month high in the previous month. Concerns on default risk in the EU and Chinese monetary tightening made a negative clench while copper's bullish fundamentals over the longer term remains intact. Macroeconomic affairs continue to dominate price direction in copper, while fundamentals play second fiddle.
The strengthening dollar and monetary tightening by Chinese government to curb inflation, tends to suggest a struggle for copper prices to recover up to their recent peaks, at least for now. In the third week of May, copper prices regained slightly due to decline in inventories and with the news of China's imports of copper beating all expectations, April's import volumes of copper and copper products hit 436,345t, up 9% from the April previous year.
However, markets are still concerned as the European financial markets declined within a short time span, indicating that the crisis still persists. With the arbitrage window moving into positive territory in early May, the first time since February, China may again surprise with a return to higher imports. Meanwhile, Chinese copper output had surged to 6.1% month on month basis and 12% year on year basis in April, to 380,000t, the fifth largest monthly output volume on record.
Despite the U.S. housing market improvement and OECD demand on its way to recovery, the financial situation in Europe and the slowdown of the Chinese economy has put an oversupply of copper on the market. The uncertain Chinese demand, over supply and other pressures may discourage prices to regain in the near future.
In continuation of the downtrend initiated previous month, as copper prices breached their support level of 50 Day EMA, we saw prices descending quite significantly after that. The metal posted a low of Rs296.05/kg where the trendline depicted in the chart acted as support level. From there on, prices retraced close to 50% of the downward rally from Rs359/kg to Rs296.05/kg to reach up to present rates of around Rs324-325/kg.
This zone of Rs325-327/kg, is again expected to act as strong barrier in letting the counter move further on the higher side. Only a convincing breach of the same would alter the trend for the metal, or else it'll face selling pressure all over again.
