It has been a poor start to 2015 for Asia’s Metals & Mining sector, with the JPM Metals index falling 0.3% YTD, trailing the broader market (+5.0% MSCI AP). As we welcome the New Year of the Goat, we do so with weak fundamentals as slowing Chinese demand faces rising regional supply across most commodities. In this report, we review key sector catalysts including China policies moves, FCF generation/capital management and falling producer currencies. At this juncture, we remain defensive with a preference for quality, low cost sector exposures.
End demand slumps into CNY. We introduce a regular Chart book tracking high frequency regional sector data points including Chinese end use indicators and regional commodity production and trade trends. Lead Chinese indicators (China PMI, M2, China Steel PMI, construction starts) indicate weak 1Q15 demand, consistent with the latest trade data showing slower imports, strong exports of steel and aluminium. Key catalysts to watch. In this issue, we focus on key sector catalysts including China’s policy moves, FCF generation and falling producer currencies. Deteriorating Chinese macro data have triggered a raft of easing policy measures from authorities.
These include easing RRR and interest rates, targeted fiscal policy measures along with stricter environmental standards being imposed on sectors with overcapacity. However, rate cuts have historically been insufficient to drive sector performance, while fiscal and environmental policy measures have yet to show a meaningful impact on market fundamentals. In this environment, companies will need to focus on internal cash generation. Elsewhere, while lower currencies help cushion weaker commodity prices, we believe the impact of price falls remain a net negative. Sector strategy – Focus on quality, low cost, growth plays. Many of the regional sector majors have already reported.
By our estimates, nearly half missed expectations, but Rio Tinto and Hyundai Steel were notable ‘beats’ due to strong cost performance. Lower capex in 2015 is a consistent theme in the results season thus far. Given weak near-term fundamentals, we stay defensive with a preference for quality, low cost plays including: NSSMC, Hongqiao, Rio Tinto and Tata Steel.
