Freeport-McMoRan executives James R. Moffett, Chairman of the Board, and Richard C. Adkerson, President and Chief Executive Officer, said in their most recent earnings report, “We are positive about the long-term fundamentals of the metals we produce.”  This despite concerns about weak global growth and slowing Chinese demand.

Freeport-McMoRan Copper & Gold (Stock Profile – NYSE: FCX) is the world’s largest publicly traded copper producer. The company’s assets include Grasberg, the world’s largest copper and gold mine in terms of recoverable reserves. FCX produced 1.44 million metric tons (mt) of refined copper in 2010, equal to 9% of the world total. The company currently pays a quarterly cash dividend of $0.3125 per share resulting in an annual dividend yield of $1.25 or 3.1%.

At 40% of world usage China is the big buyer of copper. Copper is critical for China and the country has imported unbelievable tonnages over the years. But according to the Beijing Antaike Information Development Co. copper consumption is expected to expand this year at the slowest rate since 1997.

However, the International Copper Study Group (ICSG) reports:

“The apparent refined copper balance for the first half 2012 indicates a production *deficit of 473,000 t (a seasonally adjusted deficit of 292,000 t)… As of the end of August, copper stocks held at the major metal exchanges (LME, COMEX, SHFE) totaled 434,277 t, a decline of 110,334 t from stocks held at the end of December 2011 and a decrease of 14,520 t from stock levels at the end of July 2012.”

Also, according to ICSG Copper Market Forecast 2012-2013, in 2012, world refined copper production is projected to increase by only about 2.5% to reach 20.15 million metric tonnes (mmt). Global Industry Analysts forecasts the global market for copper is projected to reach 27.5 mmt by the year 2017.

The world will need 7.35 million metric tonnes or 1.47 million metric tonnes of new copper production per year for the next five years to meet anticipated demand.

China’s Copper Market

According to Beijing Antaike, the state run nonferrous metals consultancy, Chinese copper consumption was up 7.8 percent in 2011 to 7.33 mt, is expected to grow 5.9 percent to 7.76 mt in 2012 and to reach 10 mt per year by 2020.

China has recently, and for the first time ever, revealed the size of its “copper inventories” and they scared the hell out of investors when they did it. Currently there is an estimated two million metric tons of copper in China’s warehouses.

“That has to be put in context that over the next 5 years, China will probably consume 50 million tons of copper. So there is a major strategic shortfall in the copper market from a Chinese perspective and those warehouses are really part of that longer-term solution…We don’t think it’s a big problem for the copper market going forward.” – Andrew Keen.

Let’s consider Chinese copper inventories from another perspective – 2011’s 7.33 mt of copper usage works out to 20,082 tonnes a day, so two million tonnes of copper is 99 days of inventory – just three months worth of copper, two million tonnes for a country that, even if copper usage does not grow another tonne, will use 36.65 mt over the next five years, remember no one is forecasting Chinese copper consumption to stop growing, just slowing to between 2-4 percent growth.

Also Consider

“A market can appear to be in a deficit and a surplus simultaneously because economic forecasts only look at production and demand for the calendar year and exclude excess stocks carried over from the past. The current oversupply – high inventory levels – are a consequence of the economic conditions of the last three years, current and future supply deficits will be strong enough to digest that oversupply.

 As much as one million metric tons of surplus isn’t available for sale, it has to be part of the ebb and flow of moving copper down the line to the ultimate end product. Up to 600,000 metric tons is kept as China’s rainy-day fund.” – Justin Lennon, metals analyst, Mitsui Bussan Commodities.

Do you think China might have an interest in inflating the size of its stockpiles to push prices down? And really, does it matter if they have two million tonnes or three million tonnes today?

“Whatever the Chinese say that stocks are, in the end they still need copper.” – George Cheveley, metals and mining portfolio manager at Investec Asset Management.

And tomorrow they will need more, a whole lot more, even if future economic growth “only” clocks in at an annual 7.5 percent compounded.

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