Copper Suffers Position Fatigue

Copper drops 1% in Asia trading as traders continue to book profits after a breathtaking run.

Copper’s rise since the Trump victory has really been quite breathtaking. Up nearly 40% at one stage just a week ago from November 2016’s levels. Riding the tailwinds from the initial Trumpflation trade, Copper was a one-way trade for all of December before an ugly pullback in early January. Since then Copper has been flying again, up nearly 16% for the year as of last week.

What has given Copper its 2nd wind has been a series of industrial relation/political intrigues that have directly affected the output of some of the world’s largest mines. Should they continue to drag on, the expected Copper ore surplus of 80,000 tonnes globally this year may very well melt away. Most particularly concern has focused on the two largest Copper mines in the world.

1. Escondida in Chile, the world’s largest copper mine. BHP Billiton is embroiled in a strike there with neither side looking like they wish to make concessions at the moment.
2. Grasberg in Indonesia, the world’s 2nd largest mine. Freeport-McMoRan is engaged in an arduous negotiation with the Indonesian Government over license renewals and equity sell-downs. Indonesia has banned copper concentrate exports as a negotiating lever. (that’s semi-processed ore for you and me) Production has ground to a halt with Freeport now threatening to take the Government to international arbitration. This one looks particularly messy and has the potential to seriously drag on for quite a while.

Both mines have had to declare Force Majeure’s on deliveries. This is a way of saying due to events beyond our control we can’t deliver what we said we would to you when we would, and you can’t sue us for that. It sounds much nicer in French.

There are some other disputes in smaller mines at the moment as well, but these are the two big ones.

It is perhaps surprising then that Copper has fallen from its highs at $2.8160 last week to $2.7000 today. The FOMC minutes last night reiterating a want to hike but maybe not just yet may have played a part, although it has been greeted with a universal yawn across most markets. Traders may be too complacent that both disputes will be resolved soon. More so Escondida as Grasburg has been in play since mid-January. Having had a great run, traders may just be taking profits off the table ahead of President Trump’s speech to the joint houses on the 28th. This is my favoured option in all honesty, as the lack of any coherent fiscal detail from the new administration seems to be causing reflation fatigue everywhere.

The technical picture could get interesting though it the sell-off continues.

Copper Technicals 

Copper Daily

Copper has an ascending trend-line support since the start of January that has held every pullback thus far. Today this level comes in at $2.6700 with Copper itself trading at $2.6990 at the moment.

By my calculations taking $2.6260 to the highs of $2.8160 is 19cents. Technically a break of $2.6700 has the potential to yield 19 cent move to $2.4800.

Support appears ahead of this level at $2.6185 and $2.4950 the 55 and  100-day moving averages.

Resistance is clearly last week’s high at $2.81625.

Summary

Traders should carefully follow developments at Escondida and Grasburg, with a resolution at one or the other having the potential to remove one of the cornerstones of the Copper rally permanently. From a technical perspective at break of $2.6700 should be respected.

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