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    Commodity outlook: Trade war cloud over copper, zinc; soybean sees selloff

    Synopsis

    Here’s a lowdown on what the trade setup looks like in some of the key commodities.

    metals--thinkstockThinkStock Photos
    Copper and Zinc and most of the metal prices ended with losses this week amid a strong US dollar and rising trade tensions.
    By Pritam Kumar Patnaik

    Trade war clouds and back home monsoon rains continued to alter outlook for various commodities during the week gone by.

    Here’s a lowdown on what the trade setup looks like in some of the key commodities.

    Copper and Zinc
    Copper and Zinc and most of the metal prices ended with losses this week amid a strong US dollar and rising trade tensions.

    Zinc started the week on a weaker note and hit the lowest in over 10 months as a rise in inventories signalled supplies were healthy and speculators put pressure on the market.

    Daily data showed zinc on-warrant inventories – those not earmarked for delivery – in warehouses certified by the London Metal Exchange rose 2,300 mt to 241,525 mt. The prices have shot up 83 per cent since the beginning of March.

    Copper also fell as investors grew increasingly nervous that a trade conflict between the US and China could escalate, potentially damaging economic growth and metals demand.

    Reuters reported that with US tariffs on $34 billion worth of Chinese goods due to take effect on July 6, US Treasury Secretary Steven Mnuchin on Monday ramped up the rhetoric by saying restrictions on investing in US tech firms would apply "to all countries that are trying to steal our technology".

    Additionally, US President Donald Trump and White House economic adviser Larry Kudlow outlined plans to clamp down on Chinese acquisitions of sensitive American technologies.

    Adding pressure was a strong dollar, weak May economic data in China, the world's top metals consumer, and fundamentals that do not suggest any metal is in short supply.

    Meanwhile, data also showed that China's manufacturing sector showed slower growth in the second quarter, a private survey showed this week, and a worrisome trend that could add to pressure on China's economy just as trade tensions with the US heat up.

    After two years of solid growth, manufacturers are starting to show signs of weakness, according to the quarterly survey of thousands of Chinese firms by China Beige Book International (CBB), with companies reporting the lowest growth in new export orders since late 2016 in Q2.

    However, after the initial weakness, most metals, including copper and zinc, rebounded on bargain hunting and consumer buying.

    Additionally, zinc prices also got support on the prospect of Chinese smelters cutting output by 10 per cent in response to low prices and treatment charges.

    Reuters reported that a 10 per cent cut implied that 400,000 mt of the metal would come out of the market in China, the world's biggest zinc producer, on an annualized basis.

    Looking ahead, both copper and zinc and most of the metal prices could be continued to be influenced by the looming trade tensions between US and China, with US tariff on products from China will come into effect from next week. So correction in prices could be seen during next week.

    Technically, MCX copper August contract has continued to move lower and in last one month it has tumbled from Rs 499 to Rs 452 level till now. However this has brought prices at the important support zone of Rs 452-453 levels. If it closes below Rs 452 level then further down move towards Rs 440 level is possible. On the other side any break above Rs 462 level will be positive sign towards Rs 474 level. In last three days, open interest has increased drastically from 4,979 contracts to 7,603 contracts. Hence keep a watch on Rs 452 and Rs 461 levels for trending direction.

    Internationally, Comex copper has entered in to consolidation mode near the important support zone of $2.90-3.00. We are not expecting it to break below $2.90 for now and probability of recovery towards $3.10 is a high possibility.

    Technically, MCX Zinc July contract, post the sharp fall of last three weeks, some relief sign was witnessed in last week in which prices recovered from the low of Rs 194.85 level. This has made Doji candlestick pattern which indicates halt in the down and hence positivity can be expected.

    On the weekly chart, it has arrived at the channel support which is intact since 2016 and thus bulls can try to take prices higher in next week. Move above Rs 205 will take prices towards Rs 209-210 levels. The Rs 196 will be a crucial support.

    Internationally, LME Zinc has taken a support around the $2,800 level and since then consolidation is ongoing from last few days. Prices are now close to the 100-weeks’ exponential moving average which has provided important support in the past. We can expect recovery towards $3,100 level in coming week with $2,800 as strong supports.

    Soybean
    CBOT soybean complex prices fell this week as the trade fight between the US and China continued to escalate.

    The US-China trade spat is putting pressure on grains markets. A government official told Reuters that the Treasury was drafting curbs that would block firms with at least 25 per cent Chinese ownership from buying US companies with "industrially significant technology."

    US Treasury Secretary Steven Mnuchin on Monday said forthcoming investment restrictions would not be specific to China but would apply "to all countries that are trying to steal our technology."

    Funds continued to sell off their soybean positions, as the trade battle between Washington and Beijing threatened to hamper trade in the oilseed, the most valuable US farm export to China.

    Data from CFTC showed that non-commercial traders, a category that includes hedge funds, increased their net short position in soybeans.

    Prices were also down after amid expectations of increase in moisture during the week. Storms crossed the Midwest crop belt last week and forecasts called for more showers this week. The moisture was seen as generally beneficial for crops, although rains have been excessive in a few northern areas.

    The US Department of Agriculture (USDA) rated 73 per cent of the soybean crop as good to excellent, unchanged from the prior week and the highest on record for this time of year.

    Meanwhile, investors eagerly awaited cues from this Friday’s USDA WASDE data. According to Reuter’s poll, US Soybean quarterly inventories are expected to increase to 1.225 billion bushels from 0.966 billion bushels seen in June. However, the stock levels are expected to be lower from the March levels of 2.107 billion bushels.

    Additionally, US planting of soybean for 2018 harvest is forecast to increase to 89.691 million acres from March forecast of 88.982 million acres. However the harvest is expected to be lower compared to 2017 figure of 90.142 million acres.

    Indian soybean prices also fell this week tracking weak overseas prices and prospects of higher sowing this year supported by expectations of an upbeat monsoon season.

    According to the Agriculture Ministry report of Kharif oilseeds sowing data for week ending June 14, soybean has been sowed in 0.50 lakh hectares compared to 0.32 lakh hectares same time last year and 0.27 lakh hectares in 2016.

    Meanwhile, Research Analysts Mistry said he expected India's import volumes of palm to remain stagnant as it would import more price-competitive soy oil and sunflower oil instead.

    India has set its import duties for crude soy oil and sunflower oil at 35 per cent, compared to a 44 per cent rate for crude palm oil. India raised import tax on crude soy oil to 35 per cent from 30 per cent, and on crude canola oil and sunflower oil to 35 per cent from 25 per cent in the second week of June.

    Looking ahead, slightly positive export data could limit losses in overseas soybean prices. The USDA reported export sales of US soybeans in the latest week at 1,000,800 MT (old and new crop years combined), above a range of trade expectations for 400,000 MT to 1,000,000 MT.

    However, investors eagerly await cues from inventories and acreage data from USDA tonight and a higher numbers for both could continue to pull soybean prices lower. However, a more bullish data could push prices higher.

    In the domestic markets, weather will be key on how much farmers will sow this year. During last week, according to Indian Meteorological Department rainfall was below the long period average (LPA) by 16 per cent over the country as a whole. For the country as a whole, cumulative rainfall during southwest monsoon 2018 up to 20 June, 2018 is below LPA by 10 per cent.

    So if rainfall does improve in the next few weeks, we could see improved sowing for soybeans this year and any upside could be limited.

    Technically, international US soybean futures has continued to be under pressure from last five weeks. Prices are all the way moving lower with strong momentum. It is trading below the moving average of 20 and 50 days, which is going to keep trend in sell on rallies mode. Close below $840 is going to be important where support is placed.

    NCDEX Soybean July Futures showed relief sign in which prices rallied from Rs 3,380 to Rs 3,535 level. However yet there is no medium term positive confirmation and this looks to be temporary bounce back only. To witness any kind of positivity break above Rs 3,550 is required and unless this happens we can expect prices to trade in big range of Rs 3,400 and Rs 3,500 levels. During the range bound, Bollinger Bands works well where selling near upper band and buying near lower band strategy is adopted.

    Cotton
    ICE cotton fell this week as investors remained guarded amid an ongoing trade conflict between world's biggest cotton exporter US and top consumer China.

    There is some indication that the tariffs issue may be decided by July 6 and the market is nervous over anticipating what tariffs if any would be applied to cotton.

    Market participants are keeping a close watch on rain in Texas, the major cotton-growing region in the US.

    Recent good weather and softening of demand were affecting the market. West Texas did get enough rain for the emerging crop but the area is still in drought. The Rio Grande Valley is no longer in drought so production prospects look better, according to a Reuter’s news.

    Meanwhile, US plantings of cotton for 2018 harvest are forecast to increase to 13.781 million acres from March forecast of 13.469 million acres. Additionally, the harvest is expected to be higher compared to 2017 figure of 12.612 million acres.

    In other news, the US Department of Agriculture (USDA) reported exports of 367,800 running bales (RB) for the week of June 21 were up 18 per cent from the previous week, but down 15 per cent from the prior four-week average.

    The USDA also reported net upland sales reductions of 18,900 running bales for 2017-18 and net sales of 196,200 running bales for 2018-19, which were partially offset by reductions for China (50,400 RB).

    Domestic cotton prices fell this week as sowing has commenced for the 2018-19 season.

    According to the Agriculture Ministry report of Kharif cotton sowing data for week ending June 22, cotton has been sowed in 20.68 lakh hectares compared to 24.70 lakh hectares same time last year.

    Cotton prices also fell amid reports that yarn exports has declined to China. According to Reuters, China is reducing its cotton purchases sharply, with yarn exports declined by 8.8 per cent year-on-year (y-o-y) to 1,097.4 million kg (mkgs) in 2017-18. Yarn exports to China fell 30.7 per cent y-o-y to 315.36 million kgs (mkgs) in 2017-18.

    The reason for this is Indian cotton yarn attracts 3.5-5 per cent import duty in China, while competitors like Vietnam do not attract any such tariff. Vietnam's yarn exports to China.

    Vietnam has become the second largest cotton yarn exporter in the world with a nearly 20 per cent market share in 2017.

    According to Reuter’s data, Vietnam's yarn exports to China, which stood at 287 mkgs in 2013-14, has surged to 718 million kg in 2017-18.

    Looking ahead, for US cotton, sowing area for cotton this weekend could drive prices in the short term. Additionally, next week, further clarification on the US tariff could come into play and more clarity could come from the US side and any retaliation tariffs from China. So any negative news could weigh on prices.

    Domestically, weather will be key factor now on how much farmers will sow this year. With monsoons expected to pick in July, sowing may increase and could weigh on domestic prices.

    Technically, MCX cotton July contract, in the month of June 2018 prices tumbled from the high of 23610 to the low of 21930 levels till now. Post the down move, prices are in consolidation mode from last 7 days which indicates continuing pattern and a negative sign. Open interest is constantly increasing with the down move which indicates negativity. Prices can correct towards 21600 levels in coming period. On upside 22500 is the important resistance. There is formation of bearish candlestick pattern for 3rd consecutive week which indicates downside to continue for now.

    Internationally, US Cotton Futures tumbled down from the high of $96.56 to the low of $83.02 in last 3 weeks. The momentum of selloff is strong on downside and yet there are no signs of reversal. We expect down move to continue towards $80.70 levels.

    (Pritam Kumar Patnaik of Reliance Commodities analyses outlook for various commodities on weekends, Views are his own)





    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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