What is Copper Saying Now About the Economy?
Freeport McMoRan Copper & Gold (NYSE: FCX) came out with its earnings report this morning, beating estimates, but copper is trading down this morning, more than 2%.
What does that say about the health of copper, and in turn, the global economy?
The Phoenix, AZ-based company reported earnings of $1.10 per share on $5.2 billion in revenues. Wall Street had expected earnings of $1.06 per share on $4.79 billion in revenues, so Freeport handily beat estimates. Shares started the day down, but have since turned positive. At last check, shares were up around 2% on the day.
James R. Moffett, Chairman of the Board, and Richard C. Adkerson, President and Chief Executive Officer, said, "Our third-quarter 2011 results reflect strong operating performance and favorable markets for our products. While the near-term economic outlook is uncertain and has resulted in a decline in copper prices over the last several weeks, the fundamentals of our business are strong and we have a positive view of the long-term market fundamentals. As we address union labor issues at our mines, our strategy continues to focus on effective execution of our operating plans, aggressive cost management and investing in projects with attractive rates of return to enhance our global portfolio of large-scale, long-lived and high-quality assets."
The company did mention that the Indonesian strike impacted it results, saying copper production was cut short by 70 million pounds, and gold production was cut short by 100,000 ounces. The Indonesian union said it will continue to strike until November 15, which should keep production tight, and prices supported slightly.
The company did lower its target for 2011 copper sales, going from 3.9 billion to 3.8 billion pounds. Most of this is the result of the Indonesian strike, accounting for 70 million of the 100 million pound cut. It also cut 2012 estimates from 4.0 billion pounds to 3.9 billion pounds. Any kind of cut in production estimates signals a slowing in the economy, both domestic and globally. We have seen a slower economy, albeit not to the level of a recession.
Since hitting a low of around $3 per pound in September, copper has bounced all the way to just over $3.40 per pound, but has had trouble moving over that level. A multi-day close over $3.40 would be supportive of higher prices in the longer run.
Monday night, we saw Chinese GDP come in at 9.1%, just below estimates of 9.3%. Chinese GDP has not fallen off a cliff as some have expected, but there is a clear downtrend going on. The Chinese economy overheated, and the People's Bank of China acted to cool the inflation. It does not look like the inflation is letting up, and the Chinese have not signaled any more interest rate hikes, making it appear likely the PBOC will be on hold for a while, as inflation abates.
When inflation is high, generally that is supportive of higher prices for copper, but in this case, not so, because the inflation is coming from China, the world's growth engine. If Chinese growth slows, as it has, copper falls off a cliff, as it did in September.
Copper recently has signaled things are a little bit better than the bears thought, although not as good as the bulls thought. St. Louis Federal President James Bullard made some comments this morning on Bloomberg that the recent economic data has been a little bit better than expected, and copper is supportive of that.
Copper has long thought to have a "PhD" in economics, because of its use in almost every facet of the economy. From housing, to plumbing, copper is used all over the place.
This "Doctor" is not signaling the patient is sick and dying, but rather it is a long way from recovery. The rehabilitation progress is going to take a while, but the patient will eventually recover.
Traders who believe that copper is signaling, a slow, steady growth might want to consider the following trades:
- Freeport trades at 6.5 times forward earnings. If the company were given a multiple of 10, which is about normal for a miner, there could be almost $20 worth of upside in the name.
- Another name that might benefit as traders realize the economy is not so bleak is Southern Copper Corporation (NYSE: SCCO).
Traders who believe that copper will move back down towards $3 or lower because of economic weakness may consider alternate positions:
- If copper continues to move back down, the economy is probably weakening, and earnings may get hit. Traders may short the S&P 500 ETF (NYSE: SPY) to potentially benefit.
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