Copper: Potential Production Disruption
Copper prices soared higher this week, fuelled by a combination of factors. Firstly, concerns regarding a possible production disruption at the Escondida mine in Chile sparked a surge in price. The mine has roughly a 5% share in global mine production, and so a disruption here would prove significant. Reuters reported that the main union’s current collective agreement expires at the end of January and workers have so far rejected the latest revised offer with union leaders telling members “to vote for a strike and prepare for an extended conflict”.
Adding further support for the red metal has been a rebound in investor sentiment as the market awaits expected tax reductions and increased infrastructure spending under the new administration. Speculation linked to the spending program is what fuelled the sharp rally over the final two months of 2016 and whilst metals have taken a pause over January so far, it seems that bullish sentiment is once again returning to the market.
The US Dollar Index touched 7-week lows this week as markets focus on Trump for more details regarding proposed policies. The weakness in the US Dollar has provided an opportunity for traders to take advantage of the commodity bull trend once again.
Participation has been limited this week with Chinese markets mostly out of the picture during ahead of the Chinese New Year holidays.
Copper prices rallied sharply this week to retest last year’s highs where for now price remains capped. A breakout is growing increasingly likely, and the next key resistance level will be the bearish trend line resistance where this confluence at the 2015 highs and mid-2014 lows.
Iron Ore: Goldman Sachs Issue Bearish Forecast
Iron Ore continued to rally this week moving to its highest level for more than two years. Speculation linked to anticipation of Trump’s increased infrastructure expenditure has fuelled a surge in demand ahead. Chinese demand for imports has continued at a sustained level despite repeated warnings about the over-extended nature of price movements.
Despite the rally, many institutions are maintaining bearish forecasts for iron. The head of commodities research for Goldman Sachs told Bloomberg this week that the prospect of Brazil and Australia adding supply to the market is likely to weigh on prices. This bearish view is supported by other banks such as Citi and Barclays. Citi is looking for Iron to slump to $53 in Q4 of this year while Barclays note that current price levels are not sustainable as growth in China could slow.
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Iron ore prices continue their upward trajectory, testing last year’s high levels.
Aluminium: Report of China Capacity Reduction Plan
Aluminium prices, though negative on the week now, were initially stronger deriving support from a Bloomberg report that China is preparing plans to cut around 3.3million tonnes of operational aluminium capacity in a bid to counter air pollution over the winter. According to the draft of the plan, aluminium producers in 28 cities, in six provinces are required to cut their production by 30%-50% from around the middle of October to the middle of March next year.
This would take around 12% of China’s aluminium capacity offline. However, it is likely that producers will ramp up production ahead of the destock so the effect might not be so severe on price.China’s top environment watchdog, issued verbal warnings last month to the nation’s top aluminium producer, Chalco, due to its failure to appropriately deal with pollution.
Aluminium prices reached fresh highs this week before profit taking emerged to take prices lower. Bulls still target the next key resistance level at the early 2015 lows around the 3.090 level. The broken base around 2.783 should provide decent support if tested.