Copper prices are at an all time high, coming off of deep lows in December 2008 of $1.25 lb. 3 month delivery is currently trading in Shanghai at $2.90 lb / $7,431 per tonne, extending the metal's five week winning run. Shanghai copper looks to end the week almost 8.5% up, its strongest 5 day performance in more than two months. But are there stormy times ahead? Chilean mining giant Codelco, which is the world's largest producer of the red metal, has just announced results for H1 2009.
Copper production including output from its 49% stake in El Abra rose 16% to 822,000 tonnes in the first half of 2009, from 715 000 tons in the same period in 2008. However, it seems all is not as sunny as the production figures would lead us to believe. Codelco has seen its profits sink by 82% in the first half from $4.11 Bn to $722 Mn, due to lower copper prices. A worldwide slump in molybdenum prices from $72 to $20 year on year has also not helped things along either. Although copper has had a good run, the question is, has it run out of steam, with Chinese buyers supposedly easing away from contracts, having fueled the boom by stockpiling since November last year.
Not the case according to Codelco Chief Executive Jose Pablo Arellano. He is bullish and feels that copper demand is likely to continue due to ongoing requirements from China and stimulus programs in the world’s leading economies.
“The key factor in the rise in prices is China, in the next few quarters, we should see the stimulus programs in the United States, Europe and Japan start to have an effect, something we haven’t seen yet.”
But what of US based Freeport McMoRan (NYSE:FCX), Codelco's main rival & erstwhile partner? Last month, Freeport beat analysts' expectations by a long margin, but again the upbeat news needs to be examined a little more closely. Net earnings for the quarter were $588 million, or $1.38 per share, compared with $947 million, or $2.25 per share in the same quarter of 2008, with revenues dropping to $3.68 billion from $5.44 billion, or 38%. Revenues were bolstered by gold sales, as the company ramped up production from 265,000 ounces in Q2 2008 to 837,000 ounces this year, but is debatable if this pace can be sustained, never mind improved upon. In June, Chief Executive Richard Adkerson told Reuters there was no sign of recovery in the developed world that would lead to a restart of its idled U.S. copper operations, despite a pick-up in Chinese buying.
FCX has been riding high of late and I am kicking myself, having looked for an entry at the $45 mark back in early June, only to be beaten by the market surge that has occurred. Bears should not be too dismayed, however, as it looks as though play is going to start running the other way. Inventories on the London Metal Exchange have been on the decline since March, mainly due to companies like Freeport scaling down operations, whilst feeding the Chinese appetite. March is also when we started this huge bull run, which in my opinion is starting to look a little fatigued & toppy. One of the major indicators that I have been looking at on a weekly basis is the price of copper versus declared inventory on the LME. As you can see, inventory decline petered out in early July and we are now seeing that inventory starting to climb. [click to enlarge images]
Now looking at FCX from a technical standpoint, it's pretty obvious that it has been performing well in its channel (hat tip to anyone that has been long since March), but it has also significantly not managed to break through the upper Bollinger band. It’s headed there right now; with a closing price yesterday of $66.07, the upper Bollinger is marking time at $66.87 and my expectation is that FCX is going to fail and pull back relatively sharply, with first major support at the $60 mark. If it falls through that level, I can see it triggering off a steady fall to the $52-$54 range; any “bad” news from China or any of the developed economies will put on added pressure. According to Short Squeeze, short interest in FCX has increased by 8% in the last month, which is always an indicator that something is on the horizon, especially in a stock that is 80% held by institutions.
So to summarize, China is not buying in the volumes it was, US / Europe / Japan recovery is a long way off, Codelco made huge losses whilst bolstering production and Freeport has only made positive steps due to cost cutting and stepping up gold production, not withstanding its problems at its flagship Grasberg mine in Indonesia. That gold production doesn’t have a lot of headroom either. I’ll be keeping a very close eye on this and if significant volumes start selling through to $65, I’ll be riding down the ladder as far as I can.
Disclosure: Author has no current positions