Copper prices drop to six-year low amid growth concerns

Supply glut and slowdown in China weighs on the commodity

12.00 IST, Jan 14, 2015 | 

Plunge in copper prices added frenzy to the market decline onTuesday as prices dipped by another 6% registering a broad sell off in the basemetal basket. 

By noon in East Asia, copper for March delivery plummeted 16cents, or 5.9%, to $2.49 per pound, hitting the levels not seen since last sixyears while the futures contract of the commodity on the NYMEX lost 8 cents in tradeyesterday.

Copper fell sharply in other markets too early Wednesday,with a reported 4.8% drop on London Metal Exchange amid stop-loss selling,while March copper lost 5% on the Shanghai Futures Exchange.

Concerns on oversupply and slow down of consumption in Chinaweighed on copper prices in recent months leading to a decline of 25% in thepast six months.

What’s the worry?

Any weakness in copper is often perceived as a sign of aweak economy because copper is used in a wide range of construction andmanufacturing activities. This slide is a bane of the copper miners andinventory holders as the value of the stock has depreciated while on the flipside it is a boon to the industries which use copper as its main raw materialthus reducing their input cost of production. 

However, going forward, analysts are bullish on the globaleconomic growth prospects for this year, but the copper strokes (chart)indicates otherwise. Adding to the ongoing global woes and slippage in pricesamid supply glut in copper as well as crude the World Bank on Tuesday, loweredits 2015 global growth outlook. Reason for the cut in forecast being,disappointing economic prospects in the euro zone, Japan and some emergingeconomies.

Chart Check: (image courtesy- investing.com)

The weekly chart of the Copper March futures chart looksvery weak and finds no near term support as prices continue to slide. The lastsupport level it recently broke was the May 2010 price level support of $2.77per pound. Currently the March futures contract are trading at sub $2.50levels. The chart does not identify any near term support until $1.30 priceswhich is the December 2008 support level for Copper.

Volumes are low in comparison to past week’s trade,suggesting lower participation in the contracts.

The momentum indicator (MACD) is consistently negative onthe same weekly chart since the past five months indicating that prices maytake long to recover even if it finds any support or any economic activitywhich may help the prices to retreat from these six-year lows.

The 10-period (10-week) moving average is well above thecurrent price levels suggesting that Copper may face a very tough resistance inmoving upwards in the near to medium term.

Relative strength index (RSI) is currently in the oversoldzone indicating that there could be a minor pullback in the next few weeks butother parameters and studies do not back up this stint