Sagging copper prices
Copper prices are a key driver for Freeport-McMoRan (FCX). The company expects its EBITDA (earnings before interest, tax, depreciation, and amortization) for 2H16 to rise or fall by $325 million for every $0.10 per pound increase or decrease in copper prices.
Copper has lagged other metals
The LME (London Metal Exchange) three-month copper contract closed at $4,759 per metric ton on September 21, 2016. Copper has gained 1.2% so far in 2016. In comparison, aluminum and zinc have risen 5.1% and 42%, respectively, this year.
Copper prices fell by more than one-quarter in 2015. Copper has been on a downtrend after hitting $10,000 per metric ton at the beginning of 2011. LME copper prices have fallen every year since 2011. In 2012, they managed to hold steady. They closed roughly flat compared to the previous year.
What does it mean?
Freeport and other copper producers’ earnings like Southern Copper (SCCO) and Rio Tinto (RIO) (TRQ) are sensitive to copper prices. Freeport has already seen its valuation multiple retreating this year. Markets gave a thumbs up to its debt reduction initiatives. You can read Understanding the Strategic Importance of Freeport’s Asset Sales to explore this more.
However, the goodwill from the asset sales program seems to be slowly fading away. Markets (SPY) would like to see Freeport’s earnings increase to support the next leg of the rally. Unfortunately, copper prices have fallen this year. Falling prices also put pressure on Freeport.
In the next parts in this series, we’ll look at copper’s demand-supply indicators. The indicators could help us understand the outlook for copper prices.
Let’s start by looking at China’s copper demand indicators.