20140815-Maybank_KERPL-Regional_Materials_Gems_Picks___Shovels_15页_1008kb

Regional Materials Summary

Core Content

This document provides an analysis of the materials sector in Asia, with a focus on coal, steel, and other metals such as copper, nickel, and aluminium. It includes market insights, stock recommendations, and industry developments, particularly in China, Indonesia, the Philippines, and other regional markets.

Main Points

1. Coal Sector Developments

• Production Cuts: Chinese SOE thermal coal producers have cut output by 10% to support prices.
• Price Forecast: We expect a 5% increase in coal prices by year-end, assuming demand improves.
• Tax Policy: A delayed ad valorem resource tax on the coal sector is expected to be introduced later this year, following the fall in market prices.
• Tax Impact: The tax is estimated to be 2–5% of mine selling prices or USD1–3/t. China Coal (Shanxi-based) is likely to benefit more than Shenhua (Shaanxi and Inner Mongolia-based) due to local tax reductions.
• Market Prices: Despite production cuts, coal prices remain weak, with Qinhuangdao prices hitting new lows.

2. Steel Industry Outlook

• Capacity Estimates: CISA estimates China's steel industry capacity at 1.1bt, 10–15% above expectations.
• Export Trends: Record steel exports in July (8.1mt), up 14% MoM and 56% YoY, driven by higher overseas prices and a weaker yuan.
• Challenges Remain: Steel exports are not a long-term solution. We expect capacity growth to slow to 2% per year and operating rates to rise from 74% to 78% by 2017.
• Environmental Pressures: Continued consolidation and closure of non-compliant facilities. Angang Steel has seen improved EPS due to higher selling prices and lower costs, but we do not expect sustained improvement.
• Sector Issues: Steelmakers are bypassing emission controls to reduce costs, and local governments are less willing to close capacity due to falling raw material prices.

3. Metals Outlook

• Nickel: We expect nickel prices to rise to USD9.50/lb next year, with Vale Indonesia (INCO IJ; IDR4,100; BUY; TP IDR4,600) likely to benefit.
• Copper: Copper prices are supported by lower imports and rising demand. Jiangxi Copper (358 HK; HKD14.70; BUY; TPHKD15) and Atlas Mining (AT PM; PHP16.80; BUY; TP19.72) are highlighted as top picks.
• Aluminium: Rising prices are supported by decreasing LME inventories. Chalco (2600 HK; HKD3.57; BUY) is expected to benefit from this trend.
• Zinc: Prices are supported by fundamentals, with some positive outlook for the sector.
• Inventory Trends: Nickel inventory is de-stocking, while copper imports are declining.

Key Recommendations

Industry Developments

• Rare Earths: China has bowed to a WTO ruling and will move ahead with SOE-led industry consolidation, despite the ruling's impact on its export policies.
• Export Taxes: Indonesia has revised export taxes, but no major surprises were expected.
• Bukit Asam: 2Q14 earnings increased by 15.6% QoQ, and the stock is recommended as a BUY.
• Philippine Nickel Miners: Benefited from a boom in nickel production and exports.

Market Trends and Challenges

• Overcapacity: The Chinese steel industry continues to face overcapacity issues.
• Export Barriers: Rising export barriers and stabilization of steel prices may limit the current export trend.
• Steel Trade: Copper and nickel trade shows signs of easing and growth, respectively, while steel exports remain a short-term phenomenon.
• Steel Industry: The number of steel traders and supply intermediaries is decreasing due to tight credit and low profit margins.

Supporting Data and Analysis

• Graphical Data: Includes figures on coal prices, steel production, metal prices, and inventory levels.
• Sector Analysis: Highlights the impact of production cuts, tax policies, and inventory de-stocking on prices and stock performance.
• Regional Insights: Focuses on the performance of stocks in China, Indonesia, the Philippines, Thailand, and Vietnam.

Conclusion

The materials sector in Asia is facing a mix of challenges and opportunities. While coal and steel producers are cutting output and facing new taxes, some metals like nickel and copper show positive fundamentals and price potential. The steel industry, despite record exports, is unlikely to see a long-term recovery. The market remains cautious about the sustainability of current trends, with a focus on fundamentals and regulatory changes.