6 Nov

Trade Deal Could Lift Freeport-McMoRan and Alcoa

WRITTEN BY Mohit Oberoi, CFA

Overall, the metals and mining sector has been weak this year. Freeport-McMoRan (FCX) and Alcoa (AA) have underperformed the broader market. However, metal and mining stocks have shown some strength recently. Freeport-McMoRan and Alcoa have risen 11.1% and 8.7%, respectively, in November. Will the rally continue?

Freeport-McMoRan and Alcoa

Freeport-McMoRan and Alcoa have outperformed broader markets in November. The uptrend is due to the strength in metal prices. Notably, Freeport-McMoRan and Alcoa are among the leading copper and aluminum producers. Both of the metals have been weak this year. While copper and aluminum markets are expected to be in a supply deficit this year, demand concerns have more than offset positive supply-side fundamentals.

Copper and aluminum

The International Copper Supply Group estimates that the global refined copper market was in a supply deficit in the first seven months of the year. Aluminum producers like Alcoa expect aluminum’s supply to also fall short of the demand this year. Aluminum was also in a deficit last year. A supply deficit leads to an inventory drawdown in the exchange and off-exchange aluminum inventory. However, aluminum demand has been tepid amid falling global vehicle sales. The automotive industry is one of the largest aluminum end consumers. Trade uncertainty and sagging global manufacturing activity are also weighing on metals like copper and aluminum. Lower copper prices put pressure on Freeport-McMoRan, while lower aluminum prices have a negative impact on Alcoa.

What now?

Copper and aluminum have been strong this year. Demand concerns have eased. China’s October manufacturing activity rose to multiquarter highs. The protests in Chile, a top producer, are helping copper prices. Optimism about the US-China trade war supports metal prices and stocks like Freeport-McMoRan and Alcoa. More progress in the US-China trade talks would help buoy sentiments in the metals and mining space.

While the trade deal would provide a short-term reprieve, the question about sagging demand might haunt mining companies in the medium term. Meanwhile, there was optimism about a trade deal in the past. Earlier this year, a US-China trade deal seemed to be on the horizon. However, the deal didn’t materialize. There might not be a magic trade deal between the world’s two largest economies that could propel the global economy.

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