Freeport-McMoRan Will Plummet On China's Lagging Copper Demand

| About: Freeport-McMoRan Inc. (FCX)
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Statistics that indicate China's economic and industrial growth is lower than previously thought are causing copper prices to fall. The prices are falling because China's almost insatiable demand for copper could be tapering off. This could dampen profits and plans for expansion at Freeport McMoRan (FCX) and its competitors, such as Newmont Mining (NM).

Three-month copper futures in London fell to below $8,000 a ton for the first time since January on April 13, 2012. The drop appears to have been caused by news that China's gross domestic product had only grown by 8.1% in the first quarter of 2012. Projections had called for it to grow by 8.4% in the same period. This is the lowest rate of growth there in over three years.

The price slide was actually a fairly steep one because copper had been trading at $8,220 a ton just the day before. Traders are worried because copper stocks in Shanghai are high, even though demand in China is falling. Copper had been rebounding slightly.

This price decline could definitely have a major impact on Freeport because projections had called for copper to sell for an average price of $8,445 a ton in 2012 and rise to $8,818 a ton in 2013. So far, the metal has not reached the $8,445 price in 2012.

If the trend continues, some copper producers could scale back production. Freeport could be forced to reconsider its expansion plans at Grasberg. The major new project that the company is developing at Tenke Fungurumein in the Congo could also be in jeopardy.

Copper demand had picked up slightly in early April because Chinese stockpiles had started to fall. Unfortunately, that did not seem to be the start of a trend; Bloomberg reports that copper stockpiles in Shanghai remain high and demand is still weak. If this trend continues, there could be no market for the increased production Freeport is planning.

Another reason why Chinese copper demand is down is because Chinese copper production is increasing. Reuters reported that production of refined copper in China rose by 16.7% in March to 510,000 tons. This was still below China's record copper output at 518,000 in August, 2011.

These figures could indicate that China could be able to provide more of its demand. The Chinese could have a hard time keeping up this level of production. Fu Bin, an analyst at Jinrui Futures a subsidiary of China's top producer Jiangxi Copper Ltd., told Reuters that a percentage of the new copper production came from the smelting of scrap. Fu did not say how much of increased production came from scrap copper.

That could indicate that Chinese copper demand is affected by the amount of scrap available. If large amounts of scrap are available, then demand will fall. If the Chinese smelt most of the scrap, they could start buying more new production. Unfortunately, figures about the amount of scrap copper out there do not seem to be available.

The price for scrap copper is still fairly high though. A pound of No. 1 grade copper was selling for $3.33 a pound in the U.S. on Friday, according to Scrapmonster. The same website reported that scrap copper prices fell in February, but started going up in March.

Jiangxi Delays Copper Projects in Peru and Afghanistan

Jiangxi Copper Co. Limited (600362 on the Shanghai Stock Exchange) has decided to delay plans for two new copper mines for about three years. On March 28, Jiangxi Chairman Li Yihuang told reporters that his company is slowing down work on ambitious expansion plans. He said production at the Aynak project in Afghanistan and another mine in Northern Peru won't begin until sometime between 2014 and 2016.

Li blamed an environmental review process in Peru and the discovery of a Buddhist monastery at Aynak for the delays. Yet during the same press conference, Li said he expected copper prices in 2012 will be lower than in 2011. That could indicate Jiangxi thinks future prices may not justify the new projects.

It could also mean that Jiangxi expects there to be increased copper demand in a few years. After all, the company has not cancelled the projects, only delayed them.

Jiangxi is still planning to increase production to 1.09 million tons of refined copper cathode this year. Jiangxi also plans to increase production from its own mines in China from 202,000 to 210,000 tons a year.

Jiangxi is also planning to import more copper concentrates into China, the company's financial controller told Reuters. Current plans call for an increase in imports from 900,000 tons to 1.02 million tons this year. That would be an increase of around 13%. Around 30% of these concentrates would be bought in the spot market, which could increase copper prices.

Li did not say why Jiangxi is increasing imports at a time when copper stockpiles in Shanghai are still high. This would seem to indicate that the company thinks demand is going to increase at some point in near future.

Jiangxi owns about 25% of the Aynak project in Afghanistan, which is designed to tap what is believed to be one of the world's largest untapped reserves of copper. The other 75% of the project is owned by China Metallurgical Group Corporation, which is owned by the Chinese government. The project has been delayed because ruins of historic Buddhist monasteries in the area need to be excavated before mining can begin. The Los Angeles Times reported that the area also needs to be cleared of landmines before work can start. The Taliban is also active in the area.

Another reason why this project could be delayed is the planned pullout of U.S. troops from Afghanistan. Jiangxi and China Metallurgical might have a very hard time carrying out mining operations in Aynak if the Taliban occupies the area.

Jiangxi also owns 40% of a project in Peru, with China Minmetals Non-Ferrous Metal Company, a major copper supplier in China, holding the rest. Like Aynak, this project seems to be delayed.

Newmont Could Restart Minas Conga Project in Peru

Newmont Mining could get the go ahead to restart work on its massive Minas Conga copper mine in Peru, according to news reports. Work on the project halted last year after protestors claimed it would disrupt water supplies in the Cajamarca region.

The Peruvian government is expected to receive a report about the project from three international water experts next week. The government will reportedly base its decision on whether to continue the Minas Conga project or not on that report.

Newmont owns 51.35% of Minas Conga. The Colorado-based company hopes to begin production at Minas Conga in 2014 or 2015. It hopes to produce between 155 and 235 million tons of copper a year at the site, if it gets permission from the Peruvian government. Newmont's main partner at Minas Conga is Compania de Minas Buenaventura (BVN), the largest publicly traded company in Peru. Newmont and Buenaventura also operate Yanacocha, the biggest gold mine in South America.

Minas Conga has been delayed by violent protests that have prompted the Peruvian government to send in troops and police. More protests are expected if the experts' report supports Newmont's contention that the development will not hurt water supplies. These protests and political fallout could delay the project further even if the report is favorable to the miners.

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