Regional Materials:Gems, Picks & Shovels

Material Headlines

    Chinese SOE thermal coal producers curtail output 10% to help support prices (McCloskey). We forecast a 5% increase in coal prices by year-end - assuming demand also improves.

    China to roll out the much delayed ad valorem resource tax on the coal sector later this year following the fall in market prices (CCM). Some producers will be impacted less than others.

    China bows to WTO ruling prohibiting limits on rare earth exports and moves ahead with SOE-led industry consolidation (AMM, FT). The saga involving resource politics and market exuberance ended long before the final ruling was meted out.

    CISA warns of continued challenges for the Chinese steel industry and estimates capacity at 1.1bt - 10 to 15% above expectations (SBB). Record steel exports are not a LT solution.

    Angang Steel reported improved 2Q14 EPS on higher selling prices and lower raw material costs. Has the steel industry turned the corner? We do not expect a sustained improvement.

    Impact on Stock Recommendations

    Consensus expectations appear too high for thermal coal and steel. Reiterate SELL on China Coal (1898 HK; HKD5.02; SELL) and on Angang Steel (347 HK; HKD5.79; SELL).

    We see better fundamental support for nickel, zinc, and copper. VALE Indonesia (INCO IJ; IDR4,100; BUY; TPIDR4,600) should get a boost as nickel prices rise next year to our forecast USD9.50/lb (+19% YoY, 12% above consensus).

    For copper exposure, we like high-beta play Jiangxi Copper (358 HK; HKD14.70; BUY; TPHKD15). Our top regional small-cap copper play is Atlas Mining (AT PM; PHP16.80; BUY; TP19.72).

    Chalco (2600 HK; HKD3.57; BUY) shares have benefited from rising aluminium prices supported by decreasing LME inventories. The stock may pause if Chinese supply growth accelerates later this year as we expect.