What is copper saying now about the economy?

Are we headed for another depression?

By Benzinga Oct 19, 2011 5:22PM

By Jonathan Chen, Benzinga Staff Writer


Freeport McMoRan Copper & Gold (FCX) beat analyst estimates Wednesday in its third-quarter earnings report, but copper was trading down more than 2%.


What does that say about the health of copper, and in turn, the global economy?


The Phoenix, Ariz.-based company reported earnings of $1.10 per share on $5.2 billion in revenue. Wall Street had expected earnings of $1.02 to $1.05 per share on $4.8 billion in revenue, so Freeport handily beat estimates.


Despite turning positive at midday, shares closed down nearly 3% to $34.38.


The near-term economic outlook is uncertain and has resulted in a recent decline in copper prices, the company said, but its view of the long-term market fundamentals is positive.


The company said results were affected by a strike at its Grasberg mine in Indonesia. 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 Nov. 15, which should keep production tight, and prices supported slightly.


The company lowered its target for 2011 copper sales to 3.8 billion pounds from 3.9 billion. About 70% of that cut is attributed to the strike. It also reduced 2012 estimates to 3.9 billion pounds from 4 billion. 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 back to just over $3.40 per pound, but has had trouble passing that mark. A multi-day close over $3.40 would be supportive of higher prices in the longer run.


Monday night, we saw Chinese gross domestic product 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 inflation. It does not look like inflation is letting up, and the Chinese have not signaled any more interstate hikes, making it appear likely the People's Bank will be on hold for a while as inflation abates.


High inflation is generally supportive of higher prices for copper, but not so in this case 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 Wednesay 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 "Ph.D." 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 a long way from recovery. The rehabilitation progress is going to take a while, but the patient will eventually recover.


ACTION ITEMS:


Bullish:
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 Corp. (SCCO).

Bearish:
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 (SPY) to potentially benefit.
More from Benzinga:
1Comment
Oct 19, 2011 9:20PM
avatar
Short term, copper prices are held hostage to what's going on in Euro-Land, thanks mostly to the negative press re:  Greece, Euro Land etc. which has nothing to do with long term supply/demand economics of copper pricing. Long term, copper pricing has to go up; (consider world population growth and the vast need for infrastructure upgrades  in developed countries in addition to emerging markets growth,) . Unless supply/demand economics is overridden by the Pre-election (U.S.) intentions of certain " conservative- aligned" media networks to sabotage the U.S. and global economies, --- copper prices are likely to go up from here.  The "News"  in the U.S. is no longer as Walter Cronkite used to proudly and accurately say " and that's the way it is"  ----- Vet carefully what you listen to, and watch on U.S. media /TV, and do your own supply/demand research re: investing in materials stock pricing.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.