Metals &Mining Sector:Supply side reform benefits steel more than coal
More power/coal reform might unfold to increase risks for coal sector
Bloomberg news (on 8May 2017) indicated China government might considerconsolidating major coal/power groups into three major groups. Our interviewswith industry experts indicate this might imply China government's view toincrease the efficiency of whole power/coal segments. The intention might endup being to allow downstream manufacturers to also enjoy the fruits of supplyside reform. We thus worry that the end day scenario might be NDRC furtheradjusts down the ideal range of coal prices (via releasing more new coal minesinto the system) if power groups will be asked to further squeeze value. Wewant to highlight this risk; the development of these remains to be seen.
We believe steel sector will get less intervention
Recent feedback from industry participants include:(1) rebar demand/supplyremains quite tight because rebar production doesn't seem to be able to gethigher;(2) other steel products, though demand/supply being less tight, arealso able to raise prices because of the sentiment and relatively reasonableinventory level. We believe the improvement of the steel mills profitabilityshould receive less government intervention than what China governmentdoes to the coal sector. As such, we believe the best exposure to China"Supply Side Reform" should be steel sector.
Sector preference steel > aluminum = cement > coal
With the potential new development of the coal/power segment, we believesome policy driven downside risk for coal segment might start to emerge. Assuch, we want to highlight to investors the change of our preference forSupply Side Reform beneficiaries. With the intention to extract value from thepower/coal segment, aluminum and cement sectors might be beneficiaries ofthis development as these sectors have thermal coal/power as their key costelement. Thus, we remove Shenhua but maintain Maanshan from the top pickfor the Supply Side Reform beneficiaries.