Companies positioned in the copper mining business faced more than their fair share of adversity in 2011. Labor strikes coupled with a gloomy global economic outlook kept a lid on the share prices of many copper mining stocks for much of the year. There are some indications that the worst may already be in the past for copper bulls, but it is unlikely that volatility in copper prices will be going away anytime soon.
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According to Barclays Capital, copper inventories are currently near two-year lows, following a 200,000 metric ton drop in production in 2011. This trend may not reverse itself anytime soon.
The Denver-based copper miner Newmont Mining (NYSE:NEM) is already predicting that its copper production in 2012 will be down between 17.5 and 27.2% when compared to its preliminary 2011 full-year results. A similar theme has unfolded at Rio Tinto (NYSE:RIO). Last week, the company said that its mined copper output slid 23% last year due to lower ore grades.
Lagging production by miners is only going to tighten global supplies and push copper prices upwards in the months ahead. The demand for this industrial metal is still going to be there. China is expecting GDP growth of 8.2% in 2012, and the emerging market nation consumes approximately 40% of the world's copper according to the Copper Development Association. (For related reading, see The Importance Of Inflation And GDP.)
In addition to ore grade declines and adverse weather, Southern Copper (Nasdaq:SCCO) has previously cited labor unrest as being one of the biggest contributing factors for drops in production. Looking ahead, the company has said that it expects many of these very same factors to remain prevalent throughout the year in 2012.
Freeport-McMoRan Copper & Gold (NYSE:FCX) is another miner that has suffered heavily from labor disruptions. Striking workers at its Grasberg complex hampered results significantly in the fourth quarter of 2011. Although the situation has since been resolved, it is unlikely to be the last work stoppage that the company will have to face.
The Bottom Line
There is still a fair amount of uncertainty surrounding the direction of copper prices, but I am inclined to say that market fundamentals will prevent the metal from heading significantly lower. Copper stocks have already been hit by labor strikes, weak economic outlooks and diminished production. There may be some challenges ahead, but now is the beginning of a stretch in which copper is set to shine.
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At the time of writing, Billy Fisher did not own shares in any of the companies mentioned in this article.