We have been very active in the market over the past two weeks in an
attempt to get a read on end demand in China. We also travelled to a
number of second and third tier cities last week.
We have officially launched our Survey Tools product which focuses on
Steel, Iron ore and Cement related industries. This information is unique,
given the depth of our surveys and we think it provides a good leading
indicator to end demand in China and hence investment decisions.
Key focus right now: Iron ore is the key focus at the moment given the
stocks have corrected majorly but the iron ore prices themselves remain
resilient. Our meetings in Qingdao provided us with some comfort that prices
will stay above US$160/t but for us, steel inventories are the focus.
Next thing to focus on: Beware of the restock rally! At some point we
expect to see restocks in the chain given the large destocking that has take
place and continues to take place. We will look into this further but Copper,
Nickel and to a lesser extent the bulks will be impacted.
Key stock picks – Atlas Iron, Fortescue, Rio Tinto, CNBM, CR Cement,
Sinoma, Shenhua, Straits Asia, Mitsubishi and Mitsui.
Kicking tires in China reveals the known – things are slowing. The key
thing now is to assess the extent of the slowdown and the potential duration of
this slowdown. Our initial assessment based on travels, meetings and survey
tools indicates that this slowdown may not be as pronounced as some
investors fear. Either way, the correction in stocks is well and truly overdone
in our view even if earnings are 50% wrong from current levels.
We pushed the Cement sector this week given the significant correction
in stock prices. Valuations look attractive and while we expect that there will
be some macro headwinds over the next few months, on a 6-12 months view
there is real upside. Pelen Ji’s piece on the sector puts some meat on the
bones when it comes to valuations – CR Cement and CNBM are clear
winners on a bear case earnings analysis.
Iron ore – it’s make or break time. Stocks are reflecting a collapse in the
iron ore price and traders are getting nervous. Many meetings in Qingdao
reveal that while prices might slip to around US$160/t, demand from traders,
mills and others is still very strong. Demand has dropped to some extent but
mills and traders are still worried about supply. Concerns over Indian supply
also continue to linger and we think the real focus should be on the steel
market, as we feel inventories in China are starting to build and this could be
an issue going forward.
Markets continue to be challenging and although there has been somewhat of
a relief rally taking place, we continue to focus on fundamentals and the
direction of China.