Energy prices have stabilized over the last couple of months. Notably, the production cut deal reached by the OPEC bloc has improved market sentiments.
What do energy prices have to with Freeport-McMoRan (FCX)? After all, the company has sold most of its energy assets. As a result, its energy sales should fall steeply in the coming quarters, reducing its sensitivity to changes in energy prices.
Impact on other commodities
Energy prices also impact other commodities (DBC). Historically, there hasn’t been much correlation between copper prices and energy prices. However, copper and Brent crude oil have had a much higher correlation in the last couple of years, as we can see in the chart above. One factor driving commodities lower has been the steep fall in energy prices.
Copper’s energy intensity could explain the correlation. Energy is a key raw material in the metals and mining industry. In aluminum, almost one-third of the production costs can be attributed to electricity. For copper, energy can form almost 20% of the production costs.
Unlike aluminum, the copper industry uses a lot of diesel in the production process. Diesel prices are market-linked in most places. When input prices rise, there’s scope for metal prices to see an additional increase. A similar effect can be seen in the global steel and aluminum industry, where rising input costs are supporting metal prices.
Stability in energy markets could provide a much-needed boost to copper prices. Copper producers like Southern Copper (SCCO), Teck Resources (TCK), and Turquoise Hill Resources (TRQ) (RIO) could also benefit from higher copper prices.
Along with energy markets, the Federal Reserve’s actions could also impact copper prices in 2017. We’ll discuss this more in the next article.