Persistent weak demand. Seasonal demand helped in a positive way in the
past two months, but is now working against the hope of recovery. Everyone
on the ground is telling us of persistent weak activities in property and
infrastructure construction (amid after a mild recovery in March), while home
appliance and auto demand remains lacklustre. Without material changes of
underlying demand, softening seasonal strength would appear to be more
prevalent, a negative catalyst as we had expected. More importantly, we are
concerned that the structural change in the demand growth outlook will lead
to a continued de-rating of the Chinese material sector, after several trading
cycles, when hopes of a meaningful rebound remain distant.
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Channel checks on demand—seasonality peaks. The feedback from
producers as of early May suggests: (1) The forward order books of endusers
further softened MoM, with respondents expecting improvement falling
to 17% versus 22% in April. (2) Forward order books for materials have also
weakened. Producers expecting MoM improvement were 0% for coal
(versus 50% in April), 25% for steel (versus 25% in April), 67% for cement
(versus 100% in April), 25% for base metal fabricators and traders (versus
57% in April).
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Top picks. Our preferred names are: China Shenhua Energy, China Coal
and Baosteel. Our least preferred names are: CNBM, Conch, and JXC