(July 19 2012)
So far this year copper prices have gained 2% making it one of the best performing commodities. Despite concerns over the health of the global economy, a tightening supply chain is holding up copper prices.
In their second-quarter conference call, Freeport McMoRan Copper and Gold (NYSE:FCX) CEO Richard Adkerson said “The outlook for copper, we believe, is very positive, supported by the continued challenges of the industry in terms of supply. ” … “Mine disruptions, falling grades at existing mines, delays of constructing new mines are all really supportive,” he added. Copper inventories “have dropped globally” even as economic growth has slowed, Mr. Adkerson said. “Even in Europe, with weak economic demand, copper markets remain relatively tight,” he added.
While economic growth in top copper consumer China has slowed, recent announcements have indicated that the country will buoy its growth through infrastructure spending, which will be bullish for copper. Despite indications of a slowdown in the country, Adkerson was quick to point out that China is “still growing at a substantial rate and the base of that growth is larger,” Mr. Adkerson said.
Copper is also benefiting from a rebound in auto demand in the United States. Just this past June, auto retailers reported very strong results, with most auto makers sales figures rebounding to pre-recession levels.
Underlying all the factors is the fact that supply in the copper market is not increasing, to match up with increasing demand. In fact, many mines are struggling due to declining ore grades.
Goldman Sachs analyst Sal Tharani backed up Aderkson’s sentiment that the copper market’s fundamentals remain strong. Tharani maintained a Buy rating on Freeport, this week, with a price target of $44.00 despite the company’s recent lowered production guidance. Analyst, Sal Tharani, said, “We see FCX’s lower production guidance as a non-event as the change in guidance is small and the company is known for giving conservative guidance. We remain bullish on the long-term growth story for FCX…We see the possibility of a strong 2H for copper fundamentals as inventories have come down (down 19% year-to-date) and we expect easing in China to continue in order to bolster growth.”