Since the market bottom in March 2020, we've seen incredible strength in commodities that are connected to economic growth such as iron ore, lumber, and copper. Many of the commodities in this group are at record highs or multi-year highs.
Now, there's an intense ongoing debate about whether this strength is transitory due to temporary production and supply chain disruptions, or the beginning of a new bull market. What's agreed upon is that demand for these commodities exceeded all expectations over the past 12 months due to a strong housing market and an economy that was more resilient than expected.
Inside the Numbers
Given this dynamic, it's not surprising that investors are closely watching the earnings of major commodity producers to get insight on future supply and demand trends. Freeport-McMoran
In Q1, the company reported EPS of $0.51 which was in line with analysts' expectations but a significant improvement from 2020's Q1 when the company lost $0.16 per share. Revenue fell slightly short of estimates at $4.85 billion vs $4.87 billion. Still, this was an 87% increase from last year's Q1.
The company produces copper and gold with copper accounting for about 80% of revenue. Thus, these results weren't unexpected given the strength in copper prices.
In terms of its forecast, management expects a "favorable operational and market outlook." The company expects to sell 3.8 billion pounds of copper and 1.3 million ounces of gold in 2021 and raised its guidance for 2022 copper sales to be between 4.3 billion and 4.5 billion pounds. The company slightly raised its estimates for copper production by 2.5%.
Stock Price Outlook
There are good reasons to believe that demand for copper is not transitory. An infrastructure bill is expected to pass sometime this summer. Further, many countries around the world are engaging in similar spending to increase economic activity and boost employment. On top of these, the housing sector and industrial sector have been quite strong and look to be in the early stages of multi-year expansions.
The supply side is also supportive. Last time, copper was at similar levels from 2008 to 2010, companies were aggressively spending on CAPEX. This time CAPEX is muted. In a way, the producers themselves were badly burned over the past decade as they increased production just as copper prices were collapsing. Now, they are hesitant to increase production given this experience. In an ironic twist, this will add more fuel to the fire in its bull market.
Therefore, investors should remain constructive on high-quality, commodity stocks like Freeport-McMoran.
