The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( Trefis) -- China's reduction of its GDP target growth rate for the first time in eight years has sent ripples across shares of global miners including Freeport McMoRan ( FCX), Vale ( VALE) and Rio Tinto ( RIO). Although commodity prices have reacted negatively to this news in the short term, we expect the Chinese appetite for commodities to remain strong and drive prices higher in the long term.
All About ChinaChina is consistently one of the largest metals consumers due to its industrial and economic growth, and it remains a net importer. Therefore, any movement in the Chinese economy affects the mining sector as a whole. Mining giants like Freeport derive a major chunk of their revenues from copper exports to China. This week, China cut its GDP target growth rate for 2012 to 7.5% annually, from 8% previously and 9.2% growth in 2011. This is the first time the country cut its target growth rate in eight years. The Chinese government stated that the move was an effort to make the country's economy more efficient, and we do still expect China to be the primary growth engine for metals demand. However, Freeport's dependence on China for copper demand does raise some concerns.
Copper Fundamentals Still Strong in the Long TermCopper prices have seen a major correction following the eurozone debt situation and the Chinese demand slowdown. Chinese import figures are showing an increase in inventories, implying that the copper on hand isn't being put to use. This could lead to short-term pressure on copper demand and prices. However, the metal is still getting scarcer due to its widespread applications and declining reserves. Copper consumption in China is expected to rebound in the next couple years thanks to growing demand from the renewable energy sector and several other industries. Further, rising input costs have made mining more expensive, thus discouraging large mining investments. This is causing the demand-supply gap to widen. As the global economy eventually picks up from the recent slowdown, prices will likely move higher until new capacity (and thus, more supply) comes online. Copper makes up almost 78% of our valuation price for Freeport's stock.