Regional Materials:Gems, Picks & Shovels

Material Headlines

    Iron ore prices maintain their downtrend, approaching 2009 lows (LDB). The gap with steel prices in China is narrowing helping lift company profit margins from low/negative levels.

    India mining: new environmental minister proposes simplifying forest mining regulations (BBG). Positive for those with stalled bauxite, iron ore, and coal mining projects (see picks below).

    Indian government may approve the sale of its residual 30% stake in Hindustan Zinc via offer to Sesa Sterlite (Business Today). Zinc prices are moving in a positive direction due to rising Chinese imports and falling LME inventory.

    The European steel producers’ group Eurofer has filed unfair trade cases against imports of stainless steel from China and Taiwan (Reuters). This is more potential bad news for China’s producers (nickel ore ban) and positive for those in Europe.

    Is China backing up its tough new pollution measures? China’s Ministry of Environmental Protection has handed out its largest ever fines to 19 industrial companies totaling USD66m (SBB).

    Impact on Share Recommendations

    Maanshan Steel initiated at BUY (323 HK; HKD1.62; BUY; TP2.00) - a high beta trade on a short-term recovery in industry profit margins on lower ore costs, with a resurgent railway business from stepped up China government spending.

    A pair trade is long Maanshan and short Angang Steel (347 HK; HKD4.80; SELL; TPHKD4.00), which it has underperformed, yet has higher earnings leverage to iron ore and rising value added steel sales (railway and flat steel for autos/appliances).

    A pair trade on the stainless steel trends is long Finnish producer Outokumpu (OUT1V FH; Not rated) and short TISCO (000825 CH; Not rated) China’s largest stainless producer.

    The correction in nickel appears well advanced. Our Top Pick is Vale Indonesia (INCO IJ; IDR3,720; BUY; TP IDR4,600), and for copper/zinc MMG (1208 HK; HKD2.02; BUY; TP HKD2.45).