The bulls and bears continue to press their arguments about the viability of copper miner Freeport-McMoRan's (FCX 2.23%) stock. It's a nuanced debate that speaks to many of the broader investing themes that stock buyers (and Freeport-McMoran investors) are wrestling with so far in 2023.
Three different conversations going on about copper
There are three ways that investors think about what guides copper prices, and they usually focus on the demand side of the equation. I'll return to the case for Freeport-McMoRan specifically in a moment, but if investors want a more in-depth discussion of the stock (including a discussion of the supply side), they can find it in the linked article.
With regards to demand, first, copper is traditionally seen as a play on global economic growth due to its widespread use in multiple industries. That's demonstrated in the following chart of global copper consumption by end market use. Total annual consumption is projected to rise from 28.4 million tonnes in 2020 to 45.3 million tonnes in 2040 (a 60% jump).
| Industry Sector | 2020 Consumption Share |
|---|---|
| Electrical network | 29% |
| Construction | 28% |
| Consumer & general | 21% |
| Transportation | 11% |
| Industrial machinery | 11% |
Chart by the author. Data source: 2020 Antofagasta PLC annual report. Note: Total copper consumption includes direct-use scrap.
Historically, investors have looked at this sort of data on copper and concluded that the industrial metal's widespread exposure to the economy meant it was merely a play on cyclical macroeconomic growth. If you hold that viewpoint, then there's reason to be cautious about copper and Freeport-McMoRan, at least over the near term.
For example, The Conference Board expects global real Gross Domestic Product (GDP) growth of 2.7% in 2023, slowing to 2.4% in 2024. In addition, it expects U.S. real GDP growth to slow to 1.9% in 2023 and just 0.5% in 2024.
That would appear to hand the argument to the bears, at least from a near-term perspective, as global growth is set to slow. However, that's not all there is to the demand story
What about China?
The second conversation is about China as the swing factor in determining demand. It's an argument that held sway in the run-up to the global financial crisis in 2008-2009, and it's still highly relevant now. After all, the country is believed to account for 55% of global copper consumption by volume.
Here again, the bears appear to have the upper hand. The chart below shows the state of China's industrial sector, represented by the Purchasing Managers Index (PMI) data from the National Bureau of Statistics of China. The survey data comes from Chinese manufacturers and a reading above 50 indicates expansion during that month while a figure below 50 indicates a contraction. The overall PMI has been below 50 since March and is a highly disappointing performance given that there were hopes for a significant bounce after the COVID-19 pandemic lockdown measures were eased. Meanwhile, export orders remain weak; new orders data only returned positive in August.
Chart by the author. Data source: National Bureau of Statistics of China.
There are also concerns over China's construction sector, given the ongoing difficulties at Chinese real estate developers like Evergrande and Country Garden.
Round two to the bears.
The electrification of everything
The third conversation stresses the long-term demand pull from the electrification-of-everything trend. This argument highlights the powerful, secular demand trends for copper from sustained investment in electric vehicles (EVs), charging infrastructure, industrial automation, smart infrastructure/buildings, renewable energy, 5G, and other technologies requiring electrification.
China is obviously a big part of this demand, but it's not the only player, and this is a secular growth trend rather than one guided by growth conditions in China or the globe.
This viewpoint favors the bulls because the evidence from company earnings is that there's no let-up in spending on automakers developing EVs even though they have hesitated to spend on internal combustion engine (ICE)-powered vehicles. EVs tend to contain much higher amounts of copper than ICE vehicles. For example, machine vision company Cognex's management recently said its EV-related sales were up 30% in its most recent quarter. At the same time, there were headwinds from other parts of the auto sector.
Round three favors the bulls.
Image source: Getty Images.
What it means to Freeport-McMoRan
It stands to reason that the miner's prospects are tied to the price of copper. Indeed, management gives a model of earnings and cash flow based on the price of copper on every earnings call. In the second-quarter earnings report in July, management said a range of copper prices from $4 per pound to $5 per pound would result in earnings before interest, taxation, depreciation, and amortization (EBITDA) between $11 billion and $15 billion in 2024/2025. For reference, the current price of copper is $3.77 per pound, and Freeport-McMoRan's market cap is $57.07 billion.
As such, it's essential to take some view on the price of copper before buying the stock, even if it's a neutral one and you plan for the price to stay where it is now.
All told, while the unfavorable macroeconomic indicators and mediocre growth data from China strengthen the near-term bear argument, the long-term demand trend from electrification continues to look positive, and the stock looks to be a good value based on management's projections and the current price of copper. As such, cautious investors may want to hold back from buying the stock. But if you are more confident about where copper prices will be in six months to a year, then the stock remains highly attractive.
