Gray Outlook For Red Metal Copper As It Emerges From China’s COVID Shadow

China, the world’s biggest buyer of metals, is emerging from its longest coronavirus lockdowns in two years, sending positive vibes across industries, particularly those involving construction and infrastructure.

But strangely, prices of copper, the top base metal greatly influenced by China, are falling again instead of rising. Volatility isn’t anything new to the red metal.

But if fresh COVID outbreaks, after Beijing and Shanghai, bring renewed bearish pressure upon copper, will the metal’s charts be suggesting a deeper downside too?

From a record high of $5.03 for a pound of copper traded on New York’s COMEX on Mar. 7, the metal fell to a low of $4.04 by May 12. In just over two months, it lost almost 20% as the Shanghai lockdowns dragged on.

In Tuesday’s Asian session, COMEX copper was at $4.39, down 1.7% week-to-date after a cumulative rebound of 7% over three previous weeks.

All charts courtesy of skcharting.com

It was not just copper that experienced nerve-wracking losses from the March highs that came on the back of the Western sanctions imposed on Russia for its invasion of Ukraine.

China's army of metal processors and traders flipped from buyers to sellers amid a sharp downshift in economic activity in the world's top manufacturer that heralded a potential warning sign for steel, aluminum and other key industrial commodities, Reuters noted in an industry roundup last week.

Chinese buyers drove the global surge in metals prices from mid-2020 through end-2021 as they scoured the world for ores and metals to feed its mammoth industrial engine and build inventories in anticipation of further price rises.

That order flow has reversed since March, Reuters noted, as recurring COVID outbreaks triggered extended factory and store shutdowns, choking purchases of metals-intensive products from cars to appliances, and pressuring prices of manufacturing inputs. Futures forward curves for aluminum, zinc, steel rebar, and iron ore all show prices trending steadily lower through the rest of 2022.

On Tuesday, China appeared to have new COVID challenges.

Residents in a city in Inner Mongolia have been urged to stay at home after reports of a new outbreak of coronavirus infections—just as pandemic restrictions have been eased in Beijing and Shanghai, the South China Morning Post reported.

The National Health Commission said 16 new local cases had been reported in Inner Mongolia, the third day in a row of more than 10 community cases and taking the total in this outbreak to 41. There were also 33 new local asymptomatic cases, amounting to 49 in total.

The cases prompted Erenhot, a county-level city in the Xilin Gol League, to impose lockdown-like measures, asking all residents to stay home unless they need to attend to urgent business.

Most businesses except supermarkets, pharmacies, and medical centers have been told to suspend operations, and travel in and out of the area has been restricted, the SCMP reported.

Mongolia has been hit by several COVID-19 outbreaks this year, with more than 500 locally transmitted confirmed cases from mid-February to early May. After nearly a month without new cases, Xilin Gol League reported three positive cases on Thursday.

In February, about half a dozen local officials in the regional capital Hohhot were sacked for failing their duties to control outbreaks.

Weakness in the construction sector—which accounts for roughly half of all steel and around 30% of aluminum used in China—has further undermined metals sector sentiment, prompting some processors and trading firms to sell inventories into a weakening domestic market rather than store it for later sale to end-users.

The weakness has undermined demand for copper as well.

The amount of copper used in appliances in China is set to fall around 2% in 2022 from 1.79 million tonnes last year, according to Che Guojun, analyst with state-backed consultancy Antaike.

If fundamentals for copper look suspect at best, what do the technicals say?

Sunil Kumar Dixit, chief technical strategist at skcharting.com, said copper seemed to have an even chance of picking up or slacking in the coming weeks, although the near-term suggested a bias to the downside.

He said copper has covered 50% of the Fibonacci retracement level measured from $5.03  to $4.30 and was trading at the 50 Day Exponential Moving Average of $4.40.

“This is evidence that it can gather steam to reach higher levels and break above previous month's high,” said Dixit.

He said a short-term uptrend will be further affirmed by prices breaking above $4.60, which will increase the potential for a retest of the $5.03 record high in the near term.

On the flip side, a break below $4.0 will trigger a deeper correction toward $3.80 that could extend to 3.5 initially, Dixit said, adding:

“Current price action indicates that the metal can drop to $4.30 and $4.20.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

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Written By: Investing.com