What: Shares of Teck Resources (NYSE:TECK) sank more than 11% by 3:00 p.m. EDT on Thursday. While the overall market sell-off is partly to blame, a Reuters report on Chinese copper exports weighed on copper producers today, with market leader Freeport-McMoRan's (NYSE:FCX) stock also sinking today, down nearly 9% at one point.
So what: According to Reuters, China "may be about to shock the global copper market by unleashing some of its stockpiles of the metal, which are near record highs, onto the global market." That report cited four Chinese copper traders, which said they expect the country to boost its copper exports in the next few months. That's a big deal, because China doesn't export a lot of copper, averaging just 10,000 tonnes a month this year after averaging 17,000 tonnes a month last year. Instead, it is by far the global leader in copper imports, consuming roughly 45% of annual copper production and having imported 323,870 tonnes in January.
The problem stems from the fact that China is estimated to be sitting on 1 million tonnes of refined copper stocks, which accounts for 11% of its refined copper consumption last year. The implication here is that it could start dumping some of this copper on the market, which would weigh heavily on its price. That would be really bad news for copper producers like Teck Resources and Freeport-McMoRan, which rely on the price of copper for a large portion of their cash flow. Freeport-McMoRan is particularly vulnerable right now because it's sitting on more than $20 billion in debt that it's hamstrung to pay off because of weak copper and oil prices. Meanwhile, Teck Resources gets about a third of its profit from copper, which would shrink if copper prices plunge.
Now what: Copper producers would like to see at least a stable copper price, if not one that's rising in order to deliver the cash flow they need to support their businesses. As such, any threat to its price is a threat to these companies, which is why they are falling on today's report. That said, even if China doesn't start dumping copper, the fact that the country has such a huge stockpile doesn't bode well because it implies a weakened need for future imports.