Copper prices are a key driver for Freeport-McMoRan (FCX). The company expects its EBITDA (earnings before interest, tax, depreciation, and amortization) for the second half of 2016 to rise or fall by $325 million for every $0.10 per pound increase or decrease in copper prices.
2016 price action
The LME (London Metals Exchange) three-month copper contract closed at $4,623 on September 9, 2016. Copper has fallen 1.7% so far in 2016. In comparison, aluminum and zinc have risen 4.8% and 43%, respectively, this year.
Copper prices fell by more than a quarter in 2015. Copper has been on a downtrend after hitting $10,000 per metric ton in the beginning of 2011. LME copper prices have fallen every year since 2011. Only in 2012 did they manage to hold steady, closing roughly flat compared to the previous year.
Why copper underperformed
Copper’s underperformance can be due to multiple factors. First, traders use copper as a proxy to bet against global economic activity. Faltering global economic activity has weighed heavily on copper prices.
Looking at the physical markets, supply cuts by miners (GNR) such as Freeport-McMoRan and Glencore (GLNCY) have failed to restore a market balance. Other copper producers such as BHP Billiton (BHP) and Rio Tinto (RIO) are going ahead with their preplanned production.
New supplies from some of the miners such as Southern Copper (SCCO) are also adding to copper’s oversupply. Copper markets seem to be headed for a surplus in 2016 due to the demand-supply mismatch.
Now the question might be whether copper prices will rise from these depressed levels and support Freeport’s price action. We’ll explore this more in the next part of the series.