Copper Prices Could Lift Freeport on Chinese Restocking and Indo Labor Issues
Source: Freeport McMoran Copper Website
Freeport McMoran Copper’s (NYSE:FCX) copper production may take a hit as the Grasberg mine in Indonesia faces a probable month long strike starting September 15th as labor-contract negotiations are in a deadlock. [1] This may lead to an increase in the copper price as the demand-supply gap could widen for the already under-supplied commodity. Freeport McMoran has extensive copper mining and smelting operations in North and South America, Indonesia and Africa. The company competes with other miners such as Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM).
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We currently have a Trefis price estimate of $57.60 for Freeport McMoran Copper’s stock, which is about 30% above the current market price.
Production Woes at Grasberg
A month long strike in the company’s most important copper producing region will translate into a production loss of 120 million pounds of copper which, at current prices, would lead to a $500 million loss for the company. Barclays Capital [1] estimates that the commodity faces a shortage of 670,000 metric tons during 2011, which would increase further with the production suspension at the Grasberg mine. The labor union at the Grasberg mine went on strike in July over the same issue before negotiations commenced.
Where is Copper Headed?
Copper has had a steady bull run during the past two years on account of the demand-supply gap. The metal reached an all-time high in February of this year and has corrected more than 11 percent since then. There is widespread uncertainty about copper prices with the European debt crisis and the slowdown in the US is raising concerns over the demand for the metal.
However, we believe that demand will increase in the late third quarter and the fourth quarter of 2011 as the Chinese start stocking copper to rebuild their inventory. The metal is undersupplied so a potential work stoppage at Grasberg and increased demand from China later this year may lead to an increase in the spot price.
See our complete analysis for Freeport’s stock here
Notes:- Freeport Grasberg Workers Plan Strike Sept. 15, Bloomberg [↩] [↩]