These 5 Stocks Could Fall On Copper Surplus

May.24.12 | About: Global X (COPX)

The top executives at one of the world's largest mining conglomerates think copper demand is about to come back in a big way. Charlie Sartain, the head of copper mining at Swiss-based Xstrata (OTC:XSRAY), said that his company is so confident that copper will rebound that it will increase production of the metal by 60% in four years.

Sartain also said Xstrata is implementing a $7 billion copper expansion program designed to give it enough production to unseat Codelco, the Chilean government copper company, as the number one producer. Xstrata is currently the world's number five copper producer behind Codelco, BHP Billiton (NYSE:BHP), Freeport-McMoRan (NYSE:FCX) and Rio Tinto (NYSE:RIO), although Reuters incorrectly listed it as number four. It is number four among privately owned copper producers.

Sartain believes that Chinese copper demand is about to recover. He also appears confident that the economic downturn and the ongoing crisis in Europe are not going to hurt copper demand. Instead, he thinks that demand will rise because of an economic stimulus announced by Chinese Premier Wen Jiabao this week. This would increase copper consumption by 6%, according to Sartain.

Such irrational optimism from a top executive should send Xstrata's stock falling. It indicates that the company is heading for major losses, such as those at Billiton. It also shows that executives are not paying much attention to the market and placing too much faith in politician's claims. Sartain's statements could boost the share price at Billiton, where executives have adopted a more cautious and realistic approach and admitted they are planning to cut major projects.

Xstrata plans to increase production at mines in Chile, Argentina, Peru, and Australia, according to Reuters. It is hard to see where the company will sell that additional demand.

Chinese Storing Excess Copper in Parking Lots

The demand for copper in China is now so low, that some suppliers have been forced to store unsold stockpiles of the metal in parking lots, Reuters is reporting. The companies have had to take that step because copper warehouses are filled with unsold orders.

Some Chinese companies are even trying to sell copper outside their country in bonded warehouses associated with the London Metals Exchange. That's right, the copper market in China is now so bad that the Chinese are exporting it in hopes of finding a market.

It's hard to say where they're going to find that market. Europe is currently in economic limbo because of the debt crisis. The U.S. is probably incapable of absorbing all that excess copper.

So it looks like a major fall in both copper prices and stock value for copper producers is imminent. The most vulnerable producers will be the ones such as Xstrata and Freeport McMoRan, which have been investing heavily in new copper projects. Expect to see some of their shares plunge as fast as copper is. Copper prices have already fallen by 9% in London in the last two weeks.

Catholic Church Could Stop Xstrata Project in Philippines

Xstrata may not be able to get approval for its $5.9 billion Tampakan copper and gold mine in the Philippines. An opposition movement organized by Roman Catholic priests has scared the local government into denying the environmental compliance certificate that Xstrata needs to start work.

Business Week reported that local politicians on the island of Mindanao are scared that priests and bishops will start campaigning against them if they approve the permit. It's easy to see why the politicians are so scared - around 400,000 people in South Cotabato, the region where the mine will be located, are Catholic.

The loss of such a project would undoubtedly hurt Xstrata's stock value, but it could help Freeport McMoRan. Tampakan is designed to compete with Freeport's Grasberg mine in Indonesia, which ships most of its copper to China, a. Although it must be pointed out that there may not currently be enough Chinese demand to justify this project.

Codelco and Anglo American Trying to End Legal Dispute

Codelco and Anglo American (OTCPK:AAUKY) are involved in talks to end a long dispute over the ownership of Anglo American Sur. The dispute began back in October, when Codelco announced that it was planning to use its option to buy out Anglo American's 49% of the Chilean copper producer.

A court hearing on the dispute was supposed to take place in Chile's capital, Santiago, on Tuesday. Instead, the two companies asked for a postponement so they could sit down and talk. If Anglo could settle this dispute, it might be able to boost its stock value. It could also go ahead with plans to sell part of its stake in Sur to Mitsubishi (NYSE:MTU).

There is no indication on what Anglo and Codelco will talk about or how they would resolve the dispute. Any resolution could be help Anglo retain ownership of lucrative Chilean money properties. If the dispute is not resolved, Anglo's stock could fall because it would lose its Chilean mines.

Anglo needs copper because of losses in its platinum business. Anglo is reviewing operations at its South Africa platinum division with an eye toward making cut backs, according to Reuters. Platinum prices have fallen by 40% since 2008, which leaves Anglo as the only major miner with a large platinum operation in a vulnerable position. Expect to see Anglo fall if it cannot resolve problems in Chile.

Rio Tinto Getting Out of Cable Business

Rio Tinto has decided to get out of the cable business and put $185 in cash in its coffers. Rio has sold its Canadian cable unit, Alcan Cable, to General Cable, Reuters reported. Alcan makes electrical and other cables.

Divesting itself of a manufacturing business outside of its core area of expertise is a very smart move on Rio's part. So is adding $185 in cash to its bottom line at a time when demand and minerals prices are falling. This is the kind of savvy move that should make Rio more attractive to investors and boost its stock value. Rio could also use that cash for acquisitions. There's no word on what Rio plans to do with the money yet.

BHP Billiton Could Be Planning Cutbacks in Australia

BHP Billiton seems to be considering a reduction in the size and scope of its operations in Australia. The Australian newspaper reported that Billiton is considering selling its stake in the TEMCO manganese plant in Tasmania. TEMCO recently reopened after a three -month shutdown. Billiton owns around 60% of TEMCO, while Anglo American owns about 40%.

The Sydney Morning Herald is speculating that Billiton is not going to work on the Yeelirrie Uranium project in West Australia. The Herald noted that Billiton has delayed filling a draft environmental statement, which would be necessary to go ahead with work. Billiton has not said what it will do, but the Herald's sources in West Australia noted that nobody from Billiton has been working at Yeelirrie lately.

The willingness to sell off questionable assets and say no to questionable projects could help Billiton's stock value and earnings per share. Billiton has been hurt badly by its foray into the natural gas business and expansion. If it can really scale back or halt its expansion plans, Billiton could put itself into a much better position.

If it can absorb gas losses by cutting back elsewhere, Billiton could protect its stock value and put itself into a better position. Since the gas losses have been reported at $5 billion, BHP will need to do a lot more belt tightening to impress the market. Other major projects in its plans, including the Olympic Dam Uranium and Copper mine, could be cut next.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.