Freeport-McMoRan: Why the Current Rally Could Be Unsustainable

(Continued from Prior Part)

On August 28, spot copper prices closed at $5,095 per metric ton in the LME (London Metals Exchange). Copper prices have recovered somewhat from their six-year low of $4888 per ton, which they hit on August 24. Nevertheless, spot copper prices are down ~20% since the beginning of 2015. You can see this trend in the chart below.

Aluminum has been a little better off this year, and spot aluminum fell ~13% in 2015 until it began to rise again on August 28. The benchmark seaborne iron ore contract has lost ~20% over this period. Iron ore fundamentals have been weak for quite some time now, driven by a slowdown in Chinese (FXI) demand, coupled with rising production from major miners including BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE).

Any sustainable recovery in Freeport-McMoRan (FCX) would depend on the movement in copper prices. In the global recession of 2008–2009, copper prices fell as low as $2,770 per metric ton. Back then, Freeport’s balance sheet was in a much better shape than it is today. We’ll explore Freeport’s financial strength to tackle the current downtrend in the coming parts of this series.

Meanwhile, there is a stark difference in the bloodbath in commodity prices in 2008–2009 and the downturn that we are witnessing now. Post-2009, Chinese demand led the way and commodity prices rose smartly over the next two years.

However, this time it’s the slowdown in China that’s leading to the downtrend in commodity prices.

The big question right now is how much lower copper prices could drift in the near future. We’ll discuss this in the next part of this series.

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Browse this series on Market Realist:

• Part 1 - Is Freeport-McMoRan Worth a Look for Investors?
• Part 3 - Short-Term Outlook: Freeport-McMoRan, Copper Could Drift Lower
• Part 4 - Stacking Freeport-McMoRan’s Unit Production Costs against Peers