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Commodity outlook: Copper likely to gain, Nickel may witness consolidation after sharp rise


By Pritam Kumar Patnaik

Both domestic and international copper prices rallied over 6 per cent during the week gone by supported by potential supply disruptions amid wage talks at the world's biggest mine. Reuters reported that the union of workers at BHP's Escondida copper mine in Chile said it had kicked off the latest round of labor negotiations with a contract proposal that includes a bonus of about $34,000 per worker at the world's largest copper mine.

The closely-watched talks come little more than one year after failure to reach a labour deal at the mine led to a 44-day strike that jolted the global copper market.

Also boosting the copper prices is a slightly weaker US Dollar. The dollar index fell during the week amid weak data US trade deficit which fell to a seven-month low in April. A weaker dollar makes dollar-priced metals cheaper for non-US buyers.

Fundamentally, Chiles copper production in April jumped 6.4 per cent from the same month a year earlier, Chilean copper commission Cochilco said, boosted by increased output at large, privately-held mines in the worlds top copper producer. Chile produced 446,900 MT of copper in April, Cochilco said, while country-wide production between January and April reached 1.864 million MT, an increase of 15.6per cent over the same period in 2017.

However, concerns over demand in China, the worlds top industrial metals consumer kept a lid on the market. Chinas economic growth could slow to about 4.5 per cent over the medium term, Fitch Ratings said.

Additionally, Chinas Chinalco said it had begun a $1.3 billion expansion of its Toromocho mine in Peru, which it said would raise copper output by 45 per cent by 2020. Chinas official Xinhua news agency said Chinalco aimed to bring annual refined copper output to 300,000 MT.

So, robust inventory levels on the LME exchange warehouses and early indications that talks could be constructive suggest the current strength in prices may be overdone. However, any further disruption in supply could keep downside in prices limited.

Technically, during the last week, domestic Copper had showed huge upside. From the weekly low of Rs 458, it made a high at Rs 493.25 levels. This reaffirms that medium-term trend remains positive. However, the rally has not witnessed time wise correction yet and oscillators like RSI is in overbought state. Thus one week of rangebound action is possible and post that rally should resume towards Rs 510 levels. We can expect prices to trade in the broader range of Rs 470 and Rs 495 levels. One should look for buying opportunity near the zone of Rs 475 – Rs 470 levels.

On the downside, Rs 458 is the crucial support. Open interest is at highest levels since January 2017 which is at 22,173 contracts. This is a positive sign supporting the upmove.

On the international front, COMEX copper prices have broken above the consolidation of last 17 weeks and have taken out the previous high of $3.26 levels with strong momentum. There is formation of strong bullish candlestick pattern which suggests bulls will have upper hand in the coming weeks.

Expect some sideways action between $3.16 and $3.27 and then uptrend should resume towards $3.50 levels. The moving average of 20 days has been well sustaining above 50 days EMA which is medium term positive sign.

Domestic and overseas nickel prices tracked the ferrous complex higher after a blast at an iron ore mine in China and amid falling inventories.

Also boosting the nickel prices is the weak dollar. The dollar index fell during the week amid weak data.

Nickel prices was also supported after Mexico put tariffs on American steel, retaliating against import duties on metals imposed by President Donald Trump. A net importer of US steel, Mexico is putting 25 per cent duties on a range of American steel products.

Nickel also found support amid strong speculative buying in anticipation of electric vehicle demand and strong demand in the Stainless Steel sector. Another bullish factor supporting the nickel market is that not only is there tight supply now, there are very few projects coming online in the years ahead.

According to the International Nickel Study Group (INSG), the global refined nickel market had a deficit of 77,432 MT for January-November 2017, up from the previous years level of 51,942 MT. So fundamentally, markets could continue to see more spurt of upside momentum supported by demand for the metal in electric vehicle sector and stainless sector. However, concerns over demand in China could keep a lid on the market. Chinas economic growth could slow to about 4.5 per cent over the medium term, Fitch Ratings said.

Technically, MCX Nickel June Contract prices had a strong run and made a high at Rs 1063.50 levels. Post that there is some nervousness which indicates that retracement of the prior rise is possible in coming week. We can expect range bound movement between Rs 1,010 and Rs 1,065 levels. One can buy near Rs 1,010 level where 30 days EMA is placed with support at Rs 990 levels. So, its time to witness consolidation after the sharp rise.

On the international front, LME Nickel prices as per channeling technique have found resistance of the upward moving channel. It has formed shooting star candlestick pattern which suggests prices failed to sustain at higher levels. Hence, sideways to negative action is expected in the range of Rs 14,700 and Rs 15,800 levels. One can buy near Rs 14,700- Rs 14,800 with support placed at Rs 14,500 levels.

Domestic and international silver rallied over 3 per cent this week on the back on weak US dollar.

The US dollar fell as the easing of political tensions in Italy lifted the euro and as global trade concerns resurfaced after China warned the United States against tariffs or other protectionist measures.

However, silver outperformed gold this week after the Gold-Silver ratio fell this week. In short, the gold-silver ratio represents the number of silver ounces it takes to buy a single ounce of gold. The general rule to trade the ratio is that when the Gold – Silver Ratio is at the higher end of its range it is silver friendly. So selling gold and buying silver may be popular because silver is cheap relative to gold.

So, looking at the Gold-Silver ratio of the international spot markets, the ratio ended at 79.057 last week. Looking historically at the chart, whenever the ratio has moved over 80 level mark, some correction has been observed. So similarly some correction of this ratio was also witnessed this week. The ratio was last trading at 77.97 this Friday afternoon.

So, this has suggested investors bought silver and sold gold and this is also one of reasons silver has outperformed gold this week.

Looking ahead, investors remained cautious ahead of a G7 meeting starting later in the day and other key events next week such as a United States Federal Reserve policy meeting and a US-North Korea summit.

The market is also looking for a potential rate hike by the FOMC but the dollar movement will dictate how silver will move into the next one week or so.

Technically, Comex silver, from medium-term perspective, prices have continued to trade in a narrow range of $17.35 and $16.00 levels. During the last week, there was an attempt from support of $16.33 and made a high at $ 16.90 levels. On the other side, Comex Gold has failed to show strong rise. This suggests outperformance of Silver against Gold for now. Hence any dips towards $16.50 should be used as buying opportunity for a move towards $17.10 levels. On the downside, $16.30 is the support level.

On the domestic side, the MCX Silver July Contract are following the path of international market and have risen from Rs 39,460 to Rs 40,710 levels till now. However, Open interest have not increased as compared to previous week which is at Rs 14,127 contracts. This indicates that the rise may be temporary and more rangebound action can be expected. One can buy on pullback towards Rs 39,800 with Rs 39,450 as support and target can be expected at Rs 41,000 levels where strong resistance is placed.

Palm Oil
Malaysian palm oil prices tumbled over 3.5 per cent this week amid weak export demand and rising stocks in the local markets.

Malaysias palm oil exports in May fell 8.8 per cent from April to around 1.2 million MT, independent inspection company AmSpec Agri Malaysia said. Cargo surveyor Societe Generale de Surveillance (SGS) said the countrys May palm oil exports fell 9.9 per cent to 1,199,876 MT from 1,331,564 MT shipped during April.

In Indonesia, the worlds top palm oil exporter, shipments of palm and palm kernel oils fell 13.6 per cent to 2.22 million MT in April from a year earlier, the Indonesian Palm Oil Association (GAPKI) said.

Buying for Ramadan had fizzled out as most buyers have already stocked up with the vegetable oil. This also weighed on prices.

Palm oil prices are also influenced by the movements of rival edible oils. Reuters reported that China would start auctions of soybeans from its state reserves starting June 14. This supported soy oil prices and also weighed on prices.

Malaysias palm oil stockpiles at May-end are forecast to fall 3.8 per cent from April to 2.09 million MT due to lean demand. The Poll also revealed that production in May to fall to 1.49 million MT, a drop of 4.4 per cent from April and exports are expected to fall 9.2 per cent to 1.40 million MT, their lowest in three months. This also pulled prices lower during the week.

Domestic prices also fell this week, tracking weak overseas prices. However, the downside has remained limited amid reports that India could raise an import duty on soft oils like soy oil, making palm competitive.

Looking ahead, prices in the short run could await cues from the Palm oil data from Malaysia next week. However, Malaysia re-imposed a crude palm oil export tax in May after an earlier suspension to increase demand. So this could limit downside.

But, imports from India could reduce after the country raised import taxes on crude and refined palm oil in March to the highest level in over a decade to support local farmers. Additionally, the import duty from other edible oil is less compared to palm oil, so demand for crude palm oil could remain lower till the differential reduces between palm oil and other edible oils.

Domestically, prices could also be impacted by falling import numbers for palm oil.

According to Solvent Extractors Association (SEA), Indias edible oil imports for the year to October 2018 may be nearly flat on 2017 as a weaker rupee adds to the impact of a tax hike on the countrys most imported edible oil.

Malaysian palm exports to India slumped nearly 40 per cent in April on-month, while shipments in the first half of May fell to 15,000 MT from 89,000 MT, cargo surveyor data showed.

Technically, MCX CPO June Contract after witnessing the strong rise from Rs 550 to Rs 673 levels in last few months, prices have started to move in a sideways to negative action. It has corrected towards Rs 644 levels till now and prices are expected to touch Rs 630 levels in coming week where strong support is placed. One should buy near Rs 630 levels with Rs 620 as support on downside as this will provide ideal risk reward opportunity. On upside, move towards Rs 645 can be expected.

In the international side, BMD Crude Palm Oil Futures has continued its downward journey since last 6 months. Prices have continued to sustain below 50 weeks EMA and in last week it has formed bearish candlestick pattern which will keep trend on downside. We can expect prices to move lower towards Rs 2,280 level with resistance at Rs 2,450 level.

Guar seed
Guar seed futures fell on NCDEX on mounting of stocks on relentless supplies of guar seed from growing belts, fuelled by tepid demand from guar gum makers in the spot market.

Weak oil prices also pulled prices down. Additionally, prices were impacted by normal monsoon expectations this year as normal monsoons could impact the sowing this year. Looking ahead, weather will play an important role in defining the range for the market. Additionally, crude oil prices could also impact the prices. Guar gum (a by-product of Guar seed) is used as a stabilizing, thickening and suspending agent in drilling for crude oil.

Guar gum for oil well drilling helps in efficient process with minimized water loss. So, increase in production for oil could support demand for guar gum and in turn support guar seed prices. Technically, NCDEX Guar seed July Contract downward trend has continued during this month and prices have slumped from Rs 4,480 to Rs 3,550 levels. Over medium-term, July contract can move lower towards Rs 3,350 – Rs 3,300 level where strong support is placed. Hence, any rally towards Rs 3,750 where 20 weeks EMA is placed should be used as selling opportunity for a move towards Rs 3,350 levels.

(Pritam Kumar Patnaik is Business Head at Reliance Commodities. Readers are advised to consult their financial advisers before taking any position based on these observations)

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