The WSJ on Copper PricesWhy copper prices keep rolling on?
Carolyn Cui and Ann Davis
The Wall Street Journal
Feb. 4, 2008 10:23 AM
https://www.azcentral.com/news/articles/0204biz-copperprices04-ON.html
When the economy slows, copper prices normally tumble. That isn't happening so far, which could be good news for investors digging for bargains in beaten-down mining stocks.
The price of the industrial metal, used in everything from construction to electronics, is holding up surprisingly well despite the slowing economy. Copper futures on the Comex division of the New York Mercantile Exchange - though well off their 2006 peak - have advanced 35.3 percent from a year ago.
Just this year, copper is up 7.6 percent, to $3.2605 a pound. The Dow Jones Industrial Average, meanwhile, is virtually unchanged from a year ago and fell 4.6 percent in January.
Why are copper prices behaving differently? China has gobbled up more of the red metal even as demand has waned in the U.S.
In the first 10 months of 2007, global copper consumption rose 7.2 percent, despite a drop in consumption across North and South America of 3 percent, according to the International Copper Study Group. Today, the U.S. consumes just 12.4 percent of global production, down from 21.5 percent in 2000, the group says. China, by comparison, consumes 22.7 percent of global production, up from 12.8 percent eight years ago.
Although prices of copper-mining companies have taken a beating as recession looms, many traders say the red metal's bull run isn't over. Inventories are near record lows. Although consumption rose 7.2 percent between January and October of 2007, mine production grew just 4.2 percent, says the copper study group.
This past week, HSBC Global Research upgraded Freeport-McMoRan Copper & Gold Inc. to "neutral" from "underweight," even though the company's fourth-quarter net income came in 19 percent below what analysts had expected, and a U.S. recession could cut into its business. Year to date, its share price has fallen 10 percent to $92.10, though it climbed $3.28 on Friday, and Freeport trades at 11.23 times earnings at the New York Stock Exchange.
HSBC's analysts said the recent selloff has made the stock undervalued. They noted that a series of expansions by the U.S.-based miner from Congo to Indonesia will ramp up its production. Although HSBC's Global Copper Mining Index has underperformed its Global Mining Index by 17.3 percent in the past three months, "we believe that the fears are overdone, and that plenty of bad news is now factored into copper equities," HSBC argued last Wednesday.
Freeport Chief Executive Richard Adkerson told analysts Jan. 23 that a significant amount of its future growth isn't dependent on the U.S. market. "The world will need copper, as the underdeveloped places in the world, including China and India ... develop," he said.
Freeport and some other large miners have been able to maintain relatively high profit margins despite the fact that copper is 20 percent off its May 23, 2006, peak of $4.075 a pound, and energy costs are rising. Freeport's net profit margin was 17.6 percent in 2007, doubling from 2004, though below the high of 25.2 percent in 2006. Rio Tinto PLC, the Anglo-Australian mining titan, kept 2007 margins at a lofty 28.9 percent, down from 33.1 percent in 2006.
"Under this environment, the basic strategy is to produce faster and cheaper," says Vivek Tulpule, chief economist for Rio Tinto.
Graham Birch, head of BlackRock's London-based natural-resources equity team, which oversees assets of about $45 billion, says his copper portfolio includes Freeport-McMoRan; Equinox Minerals Ltd., a Canadian firm owning mines in Chile; and First Quantum Minerals Ltd., another Canadian firm operating in Zambia and Congo.
First Quantum and Equinox shares are down this year by 7.1 percent and 10.3 percent, respectively, on the Toronto Stock Exchange. But "they do generate a lot of cash flow and pay out dividends," Mr. Birch said.
HSBC recommends First Quantum, along with Kazakhmys PLC, a London-listed copper miner with low labor costs in Kazakhstan.
Copper investors may yet be in for a rocky ride. Some analysts see signs that supply crunches are easing. Consumers also can switch to cheaper substitutes as prices rise, such as plastic piping.
But supplies remain tight. Goldman Sachs Group Inc. warned Friday that a severe winter storm in China might disrupt copper production at smelters and refiners there.
Lehman Brothers Holdings Inc. economists recently predicted China's export-led economy would slow in the face of fewer orders from the U.S. If it does, its voracious consumption of copper in everything from power plants to new homes could fall. Indeed, Standard Chartered Bank predicted China's copper imports would fall this year by 22 percent, reversing a 34.9 percent jump in 2007.
Still, many say demand is less fragile than assumed. Around 80 percent of the copper used in China goes into power generators, grid networks and construction, says Wang Danping, an analyst with Jinrui Futures, a futures-trading house owned by Jiangxi Copper, China's largest copper producer.
While export-oriented sectors like air conditioning and auto-parts manufacturers are likely to need less copper if U.S. companies cut back on imports, she says spending on infrastructure won't drop as fast. Big copper users in China have even bought mining companies to gain access to supply.