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Regional Materials Summary

Core Content

This document provides an analysis of the materials sector in India, China, and Indonesia, focusing on key developments in the power, coal, steel, and metals industries. It also includes insights on market fundamentals, share recommendations, and future forecasts.

India

• The Indian government plans to expand electrical capacity by over a third by 2020, with a USD80b investment in transmission and distribution.
• Transmission capacity is set to increase from 257,000 km to 364,000 km over the next five years, with USD27b from the government and USD3b from the private sector.
• Powergrid Corporation (PWGR IN) is the largest company in the power sector and is expected to play a significant role in the expansion, with a target of increasing its capacity by 75% to 184,000 km.
• The government is aiming to fast-track the power initiatives to meet targets on time, and is planning to further privatize the grid construction sector.
• The document highlights that the expansion of transmission and distribution infrastructure will be beneficial for copper, aluminium, and zinc galvanized steel demand.

China

• Coal: Shenhua Group has cut coal prices for the second time this year by CNY3.25/t (4%), due to lower sales. Coal prices have declined by 12% YoY, and there are expectations of a 2.5–7.5% power tariff cut later this year.
• The coal price is forecasted to decrease by 7% in 2014 and increase by 3% in 2015. Thermal coal prices are expected to bottom out over the next few months.
• Coal production and consumption are projected to grow at a low single-digit rate over the next few years, with inventory levels decreasing from 29 days in 2013 to 25 days by year-end 2015.
• Steel: Hubei province reports 30 illegal steel projects with a combined capacity of 37mt (3.5% of China's total). Many are state-owned and already funded, making it difficult to shut them down.
• Despite regulatory scrutiny, China's steel sector continues to see new projects, though some are scaled back. Crude steel output reached a record high in mid-June.
• The steel sector is expected to experience a slowdown in capacity growth to 2% per year due to regulatory delays, credit constraints, and weak profitability.
• Maanshan Steel is recommended as a "BUY" due to its exposure to railway development and improving profitability.

Indonesia

• The document includes insights on the materials sector, though specific details are limited. It mentions that the Indonesian Basic Materials team has provided marketing takeaways.

Main Points

• India: Expansion in power infrastructure is expected to boost demand for copper, aluminium, and zinc galvanized steel. Powergrid Corporation is highlighted as a key player in the power grid development.
• China:
  • Coal prices are expected to decline in 2014 and recover slightly in 2015.
  • The steel sector faces challenges from illegal projects and weak profitability, but is expected to see a slowdown rather than a reversal in capacity growth.
  • Power producers may face tariff cuts, which could impact their margins.
  • The Chinese government is tightening credit availability, affecting the metals and commodities trade.
• Indonesia: No detailed analysis is provided, but there are marketing takeaways from the Basic Materials team.

Key Information

• Share Recommendations:
  • MMG (1208 HK) is recommended as a "BUY" due to its growth potential in copper and zinc.
  • Powergrid Corp. (PWGR IN) is recommended as a "BUY" for its role in the power grid.
  • Shenhua Group (1088 HK) is recommended as a "BUY" despite the challenging environment.
  • Huadian (1071 HK) is rated "HOLD" due to its weak position in the power sector.
• Market Outlook:
  • The credit tightening cycle in China is expected to delay but not upend a soft recovery in materials demand.
  • Slowing gold imports in China may reduce support for gold prices.
  • Metals market sentiment is affected by inventory destocking and trade finance restrictions.
• Price Forecasts:
  • Thermal coal prices in China are expected to fall by 7% in 2014 and rise by 3% in 2015.
  • Coking coal prices are expected to decrease by 21% in 2014 and increase by 7% in 2015.
• Inventory Trends:
  • Coal inventory levels are expected to decrease over the next few years.
  • Steel inventory is expected to decrease from 29 days in 2013 to 25 days by year-end 2015.
• Industry Challenges:
  • Fraudulent gold transactions have led to credit concerns, affecting metals trading.
  • Illegal steel projects in Hubei province pose a challenge to the sector's growth.
  • Weak industry profitability and credit availability are slowing down capacity growth in China.

Figures and Data

• Figure 1: Copper consumption in China is expected to increase slightly.
• Figure 2–25: Exchange prices and inventories for various metals including copper, zinc, aluminium, gold, silver, platinum, and palladium are presented.
• Figure 26–37: Coal and steel price trends, production, and inventory levels in China and other regions are detailed.
• Figure 38–43: Trade data for refined copper, copper concentrate, alumina, bauxite, refined nickel, and nickel ore are provided.

Contributing Analysts

• Hong Kong/China:
  • Alexander Latzer (metals, coal, steel)
• India:
  • Anubhav Gupta (metals, steel)
• Indonesia:
  • Isnaputra Iskandar, CFA (metals, coal, cement)
• Philippines:
  • Ramon Adviento (metals, coal)
• Malaysia:
  • Lee Yen Ling (steel, building materials)

Research Offices and Contact Information

• Regional Head of Institutional Research: Wong Chew Hann, CA (603) 2297 8686
• Regional Head of Retail Research: Ong Seng Yeow (65) 6432 1453
• Chief Economist (Singapore/Malaysia): Suhaimi Lijas (603) 22978682
• Chief Economist (Indonesia): Juniman (62) 21 29228888
• Head of Research (India): Jigar Shah (91) 22 6623 2601
• Head of Research (Singapore): Ng Wee Siang (65) 6432 1467
• Head of Research (Indonesia): Wilianto IE (62) 21 2557 1125

Summary of Key Trends

• India: Strong government investment in power infrastructure is expected to drive demand for copper, aluminium, and zinc.
• China: Coal prices are projected to fall in 2014, with a potential recovery in 2015. The steel sector is facing challenges from illegal projects and weak profitability, but is expected to see a slowdown in capacity growth.
• Indonesia: Limited detailed analysis, but marketing takeaways are provided.

Outlook

• The materials sector in India and China is expected to benefit from infrastructure development and government policies.
• The steel sector in China is expected to see a gradual recovery in profitability, but growth in capacity is expected to slow.
• Credit concerns in China are affecting metals trading and inventory levels, which may delay but not prevent a soft recovery in materials demand.