Freeport-McMoRan: Speculate

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Chinese workers monitor production of coiled copper tubes at a copper product plant in Nantong city, east China's Jiangsu province, 7 January 2015. Economists say the world economy will do better this year. The copper market is saying that won’t be enough to eliminate a supply glut that's lasted at least two years. Prices of the metal slumped to the lowest since October 2009 today, fueled by concerns that production is outpacing demand. China's copper consumption will grow at the slowest pace since at least 2010, Deutsche Bank AG predicts. At the same time, global economic growth will be the best in four years, economist estimates compiled by Bloomberg show. Copper's plunge mirrors losses across commodities as a decade-long bull market led companies to boost production and the Federal Reserve debates when to raise interest rates. Investors last week doubled bets on more losses in copper, already the worst-performing industrial metal in the past year after plunging 17 percent.

We could be going out on a limb here, but we believe Freeport-McMoran (NYSE:FCX) is a buy.

This former “Trump Trade” darling that was up 95% in 2016, has been a dud thus far in 2017 – down 13%. Part of what moved this stock higher was the belief that a Trump election would lead to a $500 billion infrastructure and economic stimulus. With Trump’s legislation stalling and the future of Freeport’s Grasberg mine in Indonesia looking uncertain, bullish momentum has fizzled out.

Despite the headwinds, there are enough bullish signs at the current share price to consider speculating here and going long Freeport.

1. Stabilizing Copper Prices

Obviously one of the top concerns is commodity pricing. Since 2011, copper prices have been cut in half, dropping below $2.00 per pound briefly before stabilizing and recovering to around $2.60 today.

The main reason for the drop in copper was related to China’s economic slowdown and a decrease in Chinese imports. China is the largest consumer of copper in the world, so obviously if the Chinese economy is struggling, this will have wreak havoc on supply and demand.

The World Bank has a bullish outlook on copper, expecting the commodities price to increase by 18% in 2017. This hike is expected both on beliefs that global demand for copper will continue to improve and that mine disruptions will affect supply.

 

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