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Low commodity prices pound a global mining giant

Scott Tong Dec 28, 2015
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Arizona-based Freeport-McMoRan, the world’s largest listed copper producer, saw its founder and its executive chairman step down this morning. Then its stock fell nearly 10 percent.

Two years ago, Freeport-McMoran diversified by investing in Gulf Coast oil and gas production. But now the entire commodities sector has gone bust. By one index of metals, minerals, oil and grains, commodities prices are the lowest they’ve been in 13 years.

“We haven’t had a cycle that I can recall where everything went down at the same time,” said Chuck Bradford of the investment firm Bradford Research. “Even the soft commodities. With the exception of maybe cocoa, most of the grains have the same kind of chart pattern as the hard commodities.”

In 2015, 48 percent of global corporate defaults occurred in the commodities sector, according to Moody’s Investors Service. The credit rating firm described the commodities sector as facing “staggering adverse conditions.”

Bradford cites two factors. First, the U.S. dollar is strong, so buyers abroad have weak currencies and weak purchasing power. They buy less.

And, demand from China has slowed.

“It had to slow down,” he said. “It’s basically the law of big numbers. You can’t keep growing at a better than 10 percent growth rate indefinitely.”

The prices of metals, minerals and oil have swung down violently. Recent studies have found that when there’s a glut of a commodity, the extra tends to sit there as the price falls. No one wants it.

“If there’s an extra gallon of oil lying around outside your tank once you fill up with 15 gallons, that 16th gallon, you don’t give any value to it,” said energy economist Ed Hirs of Hillhouse Resources and the University of Houston. “And right now in the global oil market, we have a lot of those 16th gallons sloshing around.”

So for now, mining and energy producers, including Freeport-McMoRan, have to suffer until prices come back up. Two months ago, the company CEO stole this lyric from a country-western song:

“If you’re going through hell, keep on going.”

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