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Asia Materials sector:Key messages from JPM's China Summit 2014
Source: Asia Research 2014-06-19 17:15
Major domestic and global commodity producers attended J.P. Morgan’sChina Summit last week. For the producers, policy moves to containcapacity were seen to help steel and cement markets, while the exit of highcost producers was expected to stabilise coal and iron ore markets. Ondemand, after a slow 1H, most expect a recovery in 2H14 as China’sgrowth stabilization policies take effect. For investors, weak propertyindicators and the Qingdao port investigations remain key concerns – wesee favourable risk-reward conditions in selective sector exposures.
China steel markets improve, raw material surplus waiting on exitof high cost producers. Angang notes stable steel demand and lowercosts are feeding through to improved margins; they remain encouragedby planned capacity closures. While iron ore producers FMG, VALEand RIO expect high cost Chinese mines to soon exit the market withprices trending back over $100/t (providing the potential for capitalmanagement initiatives), Angang sees structurally lower iron oreinventory holdings and expect prices to fall to $80/t in 2015.
Coal markets facing weak demand outlook and too much supply.
Shenhua and China Coal Energy both see coal demand challenged inthe near term. With over 40% of the industry in losses in 1Q14, bothcompanies expect reduced supply from smaller, high cost coal mines tohelp rebalance markets. However, import supply remains resilient. Spotthermal coal prices (cRmb520/t) were viewed as holding support withlimited downside, but equally capped to the upside by weak demand.
Aluminium oversupply to persist but demand still robust. Chalcoexpects domestic primary aluminium oversupply to persist with c3mtpaof additional capacity forecast to come online in 2014. Of this, ChinaHongqiao will contribute c240kt of new capacity (to 3.24mt). While lowprices have seen an estimated 1.5mt (Chalco 0.6mt) of capacity idled inthe YTD, renegotiations with power generators can potentially see someof this come back online. On the positive side, aluminium demandremains robust with Chalco expecting 10% growth in 2014.
Cement oversupply reducing with closures and environmental drive.
BBMG was upbeat on Northern China cement markets highlightinglimited supply additions and likely improved infrastructure demand fromthe integration of the Beijing-Tianjin-Hebei region. BBMG’s 2Q14utilization rates have risen to 100% in 2Q14 from 60% in 1Q14 leadingto a sharp rise in GP margins. Whilst in Beijing, we also visited CNBM,which indicated improved 2Q margins particularly in China United andSouth West operations. CNBM views the elimination of lower gradecement, PC 32.5, as positive for clinker utilisation and sees potential forthe VAT refund to be transferred to PC 42.5.
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