Freeport-McMoRan Copper and Gold (FCX) will report a 16% drop in revenue for 2013. Copper accounts for 79% of the company's revenue but the recent rally did not help the company's short-term revenue projections. FCX is one of the number of companies experiencing shrinking revenues as the price of copper struggles to reach profitable margins. The industrial metal has been on a 10 week bullish run which was helped by data on positive European growth China. The Feds "grayish" decision-making process regarding the economic stimulus has dampened the metal's progress but not all analysts seem too concerned about this.
Even though some analysts don't seem concerned, others believe the recent rally is a short term, short-lived one. Looking at a bigger picture, some analysts believe that copper is still on a journey that will take it below thee dollars a pound. The move of the dollar usually has an effect upon commodity prices, especially copper. The US dollar did not fare well in August which added to the benefit of copper as a whole.
Another contributor to the rally is the three months of rising copper imports in China. There is demand for the metal as collateral for financing as well as the arrival of previous shipment orders. This is not translating into use in the industrial sector though.
Even though the news that the Chinese economy was contracting the robust demand for copper continued. Many investors expected a slowing economy would translate into fewer shipments and use in China's domestic market. The reality of a slowdown in orders came to the market in mid August. We can see this by the top in the rally from the USB Copper Subindex (JJC).
But the rally appears to be over. Investors have cooled to the increasing prices of copper as the revelation of weakness in the emerging markets economies grows. The weakness in numerous emerging markets economies poses a risk the outlook of commodity prices in the near future. The main emerging market economies (China, Russia, India and Brazil) have all recently shown a slowdown.
Why is this rally considered short-lived and not just taking a rest before goes up?
Next year, production of copper is expected to exceed demand by 480,000 metric tons which wipes out the 167,000 ton excess in 2013. The short-lived rally grew on signs of expansion in Chinese manufacturing but prices are expected to drop by up to 6.1% according to analyst's expectations compiled by Bloomberg.
There are mining projects and refineries that are expanding that deal with copper that are not going to stop. There is a huge wave of "copper supply growth" that will continue to suppress prices. The London Medical Exchange monitors warehouse stockpiles and even though they have dropped by 11% the last two months, they are 84% larger than they were at the start of the year. On top of this, orders to remove the red metal from storage fell 23% in July and August.
China, which accounts for 35% of the global supply, will increase production of refined copper by 14% next year but its economic data does not suggest a huge surge in demand that will keep up with production of the red metal. The combination of increased production and refining matched with a slowdown in the emergent market economies has produced a huge oversupply in the metal which will keep prices low through the end of the year.