Wednesday, September 16, 2009

>PRC Metals and Mining Chart Park (CITI)

Is This Sector Hot or Not?

Mixed signals – The fall in steel prices through August highlights the power of speculative demand and over-stocking versus the timing of real demand. A combination of seasonality, fear and de-stocking has left prices below the February lows, and headed for the Oct ’08 lows. Despite this, copper and gold look robust, likely a function of financial rather than industrial buying.

China Materials is looking like an inverse play on the US and EU economies – With no export growth, China policy will remain focused on domestic growth with high materials intensity. Moreover a weak US will see a weaker US$, which is positive for materials prices from traditional demand sources, along with sustained dedollarisation decisions from investors and governments.

3Q results and 4Q demand will hold most sway in the next 2-3months – With 3Q09 results, more so than 2Q09, we will be able to gauge the recovery in profitability versus the announced price increases. Moreover, we will have visibility on the strength of 4Q09 demand, which is expected to be strong. Worryingly, this may already be in the price.

Order of least preference for China: Steel, Bulks, Base Metals, Cement and Gold – Stock specific drivers aside, Steels are looking the most vulnerable near-term, as are the bulk plays in the region, especially coking coal, which has had a good run but which will struggle if steel prices continue to dive. However, we would use this as a buying opportunity for coking coal.

To see full report: METALS & MINING