Global Turmoil Continues to Weigh on Freeport-McMoRan



Global turmoil

Previously, we explored some of Freeport-McMoRan’s (FCX) strategic options. Commodity prices are trading at multi-year lows ever since China, which has been the engine of global growth, slowed down.

China’s 2Q15 GDP (gross domestic product) came in at 7%, beating market expectations. However, several economists have questioned the data, fearing it doesn’t reflect the true state of the Chinese economy.

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China’s slowdown

The above graph shows China’s manufacturing PMI (Purchasing Managers’ Index) released by Markit. In July, China’s flash PMI came in at 48.2, which is a 15-month low. The PMI came in lower than what analysts were expecting. China’s PMI has been below 50 for five consecutive months. Figures below 50 are generally associated with a fall in manufacturing activity.

China’s slowdown could continue to weigh heavily on metal companies, including Freeport, Rio Tinto (RIO), and Vale (VALE). Lower Chinese demand would continue to put pressure on metal prices.

A further correction in copper prices?

Freeport’s earnings are sensitive to copper prices. The company estimates its EBITDA (earnings before interest, taxes, depreciation, and amortization) fall by $500 million for every $0.10 per pound fall in copper prices.

Goldman now expects copper prices to reach $4,500 per ton, or approximately $2.04 per pound, by the end of 2016. This represents a ~15% downside from current copper prices.

Gold and energy prices have also been falling, and there’s nothing to suggest that we’ve reached the bottom yet.

Metal shares bear the brunt whenever there’s a global turmoil in the markets. So while the broader US markets (SPY) (VTI) are scaling their all-time highs, Freeport is still struggling to find its bottom.

You can stay updated on this industry by visiting Market Realist’s Copper page.


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