Copper prices have taken a hit over the past few weeks due to fears that demand will remain depressed as a result of the global debt crisis. While we acknowledge a severe economic slowdown could depress prices in the near term, we believe that there is ample upside to the price of copper owing to demand from China. A recovery in the market price would help the profits of Freeport McMoran Copper’s (NYSE:FCX), Newmont Mining (NYSE:NEM), Vale (NYSE:VALE) and Barrick Gold (NYSE:ABX). Freeport McMoran has extensive copper mining and smelting operations in North and South America, Indonesia and Africa.
We currently have a Trefis price estimate of $42 for Freeport McMoran Copper’s stock, which is about 20% above the current market price.
Copper prices have been volatile in 2011
The spot price of copper has fluctuated substantially in 2011. It opened the year around $3.75 per pound, exceeded $4 per pound this summer and is now around $3.30 per pound. The price movements have largely been driven by two factors: demand from China and global economic concerns.
China is the largest consumer of copper with more than 40% of copper demand, or 8 million tons annually, and has been aggressively buying the metal for the past two years to stock up its inventory and hedge against any kind of supply shortage and price increases in the future. At the end of the first quarter of 2011, Chinese importers started clearing off their inventory and reduced the imports as the metal had crossed $4 in the LME. This led to a decline in spot prices.
Moreover, the market price of the metal has seen a substantial decline of late due to the fears that the global debt crisis will impact near-term demand.
Our near-term outlook is still positive
We still estimate substantial consumption of copper in China going forward. Chinese demand is almost certain to come back as importers will look to replenish their inventory in the latter part of 2011. Reports suggest that there will be a shortage of 368,000 tons of copper this year which will likely increase in 2012 until the new production facilities are up and running. We believe that copper will cross $4 per pound by the start of 2012 and may actually average in excess of $4 for the entire year. The important thing to watch here is the dependence of the copper price on Chinese demand, where traders are able to move the entire market based upon their calls. ((China’s Doctored Copper Demand, WSJ))
The high spot price has made it increasingly profitable for companies to mine copper. Those in control of good copper resources are making a rush to develop new mining projects and expanding capacity of existing ones. Mining giants like Vale (NYSE:VALE) and Chile’s Codelco are looking to increase their copper output in order to cash in on the high prices. Vale’s Salobo mine will enter production next year with an output of close to 100,000 tons of copper and it is estimated that the output from the mine will double by 2014 . 
Gold mining giant Barrick Gold has even acquired Equinox Minerals in order to expand its copper operations. We expect that other miners will likewise look to increase their production. With these aggressive expansion efforts by miners, we expect that supply will eventually outpace the demand for copper in the next 4-5 years, eventually pushing the price below $3 per pound.Notes:
- Copper price outlook is favorable: Goldman analyst, Marketwatch, Oct 2011 [↩]