20140722-Maybank_KERPL-Gems,_Picks___Shovels2_15页_1mb

Regional Materials Summary

Core Content

The document provides an analysis of the regional materials sector, focusing on coal, copper, aluminium, nickel, zinc, and steel. It outlines current market conditions, price trends, supply and demand dynamics, and stock recommendations for key players in these sectors. The report also discusses geopolitical risks, trade financing issues, and the outlook for the coming year.

Main Points

• Thermal Coal: Prices have fallen again, with China Coal and Shenhua reporting flat and -3% coal sales YoY respectively. This suggests a likely downgrade in volume guidance and continued pricing issues. The report advises avoiding the sector or buying on dips for trading accounts. Prices are 9% lower than 1H14 averages, with a soft recovery expected as market conditions stabilize.

• Aluminium: LME prices have risen to a one-year high, indicating a tightening supply situation. However, most Chinese smelters are still operating at a loss, despite the price increase. The report highlights the potential for a 3mt capacity increase in China by 2015, with a cautious optimism for the market. Regional cost advantages are flattening due to lower coal prices and rising transport costs.

• Copper: Prices are holding above consensus. The report recommends Jiangxi Copper for high-beta exposure and MMG for long-term growth. Atlas Mining is highlighted as a top regional small-cap play. Copper demand is expected to grow at 6-8% annually, while supply growth is slowing.

• Nickel: The report forecasts nickel prices to rise to USD9.50/lb, which is 19% YoY and 12% above consensus. Vale Indonesia is noted as a lagging play that could benefit from the price increase. Tight supply is expected to persist, with a positive outlook for the sector.

• Zinc: Market sentiment is rising due to improving demand growth and slowing supply. The report recommends MMG for long-term zinc exposure.

• Steel: Prices and demand are suffering due to slowing growth and excess supply. The report suggests Shenhua as a better buy than China Coal, which is reiterated as a SELL due to EPS downgrades and likely capex cuts.

• Geopolitical Risks: The report mentions the potential for a soft recovery in 2015 amid rising geopolitical risks. It also notes that a trade embargo on Russia could hurt Western companies but benefit oil/gas, nickel, and aluminium prices.

• Trade Financing: Western banks are reportedly pulling back on financing metals exports to China after ICBC's actions. This could lead to a slowdown in import growth and a shift to LME-registered warehouses.

Key Information

• Stock Recommendations:

  • Buy: Jiangxi Copper (358 HK; HKD13.86; TPHKD15), MMG (long-term copper and zinc), Vale Indonesia (INCO IJ; IDR3,790; TPIDR4,600), Shenhua (1088 HK; HKD20.85; TP24), Chalco (2600 HK; HKD3.08; TPHKD3.20).
  • Sell: China Coal (1898 HK; HKD4.12).

• Market Outlook:

  • 2015: 65% chance of moderate price increases (10% average), 25% chance of volatile but lower prices if China remains neutral, and 10% chance of a strong rally (>20% YoY).
  • Nickel, Copper, Zinc: Strong demand and tightening supply.
  • Aluminium: Good demand but needs more supply cuts.
  • Thermal Coal and Steel: Slowing demand and excess supply.

• Supply and Demand Trends:

  • Coal: Weak Chinese demand growth and insufficient supply cuts. Indonesia's coal production increased by 7% YoY.
  • Aluminium: Capacity curtailments in China and the West. Expected 5mt new capacity and 2mt cuts by 2015.
  • Copper: Demand growth is expected to remain healthy.
  • Steel: Mixed demand, with weakening in China but positive in India.

• Inventory and Prices:

  • Copper: Exchange prices and inventories are closely monitored.
  • Nickel: Tight supply and potential price increases.
  • Aluminium: Inventory decline indicates supply cuts are working.
  • Thermal Coal: Prices have fallen significantly in both China and the region.

Our Views

• The materials market is expected to experience a soft recovery in 2015, with moderate price increases.
• The report highlights the importance of supply and demand dynamics, particularly in copper, nickel, and zinc.
• Trade financing issues and geopolitical tensions pose risks to the recovery, but are not expected to derail it.
• Gold is seen as range-bound to the downside due to expected higher interest rates.

Figures and Data

• Figures 1-37: Provide detailed insights into price trends, inventory levels, production data, and trade statistics for various materials.
• Key Data Points:
  • Thermal coal prices in China and Australia have declined.
  • Aluminium prices are rising, with a shift in market dynamics.
  • Copper prices are holding above consensus, with positive long-term growth expectations.
  • Nickel prices are forecast to rise significantly, with a positive outlook for Vale Indonesia.

Analysts and Contact Information

• HK/CHINA: Alexander Latzer, Regional Sector Head.
• INDIA: Anubhav Gupta, Jigar Shah.
• INDONESIA: Isnaputra Iskandar, CFA.
• PHILIPPINES: Ramon Adviento, Lovell Sarreal.
• SINGAPORE: Yeast Chee Keong, CFA.
• THAILAND: Jesada Techahusdin, CFA.
• VIETNAM: Trung Thai, LL Hong Lien, ACCA.

Disclaimer

• The report is for general information and not personal investment advice.
• It is not verified by MKE and should not be relied upon.
• Forward-looking statements are subject to change and based on assumptions and available information.