Regional Industry Focus DBS Commodity Tracker

Transcription

1 Regional Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 3 Aug 217 Price momentum to slow down Base metal prices have rallied strongly for last three months, backed by better-than-expected demand Zinc price hit a 1-year high and nickel price surged due to demand recovery and mine closure Tin price is stable, defying concerns over supply growth from China Price growth to be weakened by profit-taking appetite Metal price rally gained strength since June. Base metal prices have seen an acceleration in upside momentum, with the LMEX Metals Index registering m-o-m growth of 3.4%, 4.4% and 5.8% in Jun, Jul and Aug (up to date), respectively. This is driven by improved demand, backed by robust economic growth the world over, including China. Also, supply disruptions due to mine closures and supply reform in China have reinforced the metal price uptrend. Zinc price continued to rally; nickel, the best performer in Aug. On 16 Aug, LME zinc price (spot) has broken through the US$3, mark for the first time since Oct 27 and recorded a 1-year high. The global zinc supply/demand balance remained in deficit in Jun due to scarcity of zinc concentrates, especially in China. Meanwhile, LME nickel price surged 17.5% last month, thanks to i) improving demand outlook for stainless steel, and ii) some mine closures due to accumulating losses. In addition, the resumption of ore exports from Indonesia has had a limited impact, thus alleviating concerns. No increase in China s refined tin exports yet. Tin was the worst performing metal in Aug as its price remained almost flat. Despite concerns over supply growth from China following the government s export approval for Yunnan Tin, the world s largest refined tin producer, China s refined tin exports have declined 22.1% y-o-y in 2Q17. On 2 Aug, the Bangka Belitung governor announced that the local government would issue a moratorium on tin mining licences to curb illegal mining. Since the announcement, PT Timah s (TINS IJ, BUY, TP Rp1,) share price had risen 12% to Rp91 on 25 Aug. Expect price momentum to decelerate. We expect the metal price rally to likely take a break on growing appetite for profit-taking. Also, the weaker indicators for Chinese economic growth and construction activities would weigh adversely on the price uptrend in the near term. However, we remain positive on mid- to long-term outlook in anticipation of demand growth and ongoing sector restructuring, as well as stricter implementation of environmental regulations in China. Our top pick in the base metal sector is Korea Zinc (113 KS, BUY, TP KRW61,). CRY Index : Analyst Lee Eun Young eunyoung@dbs.com Key prices 25-Aug Last Price w-o-w m-o-m (%) YTD World Hot Rolled China Hot Rolled Spot % Fe Iron Ore (CFR China) (.6) Premium Hard Coking Coal (CFR China) (6.5) Aluminium 2,97 (.4) Copper 6, Zinc 3, Lead 2,342 (2.) Nickel 11, Tin 2, (2.) Gold (US$/oz) 1, Silver (US$/oz) Baltic Dry Index (Pt) 1,29 (4.) LME Metals Index vs. Dollar Index (pt) 5, 4,5 4, 3,5 3, 2,5 2, LMEX London Metals Index(L) Dollar Index Spot(R) 1, (pt) ed: CK / sa:ym, PY

2 Base metal price rally Base metals have been performing strongly across the board, with the LME Metals Index rising 6.9% m-o-m and 18.5% YTD. The price resilience of base metals attests to the sustained global economic recovery. Notably, China, the biggest consumer for metals, has surpassed the consensus GDP growth estimates for both 1Q17 and 2Q17. Additionally, the sentiment for base metals has been further buoyed by a weaker US dollar (-1.4% m-o-m; -9.3% YTD). LME Metals Index vs. Dollar Index (pt) 5, 4,5 4, 3,5 3, 2,5 2, LMEX London Metals Index(L) Dollar Index Spot(R) 1, (pt) Zinc price hits 1-year high On 16 Aug, LME zinc price (spot) has broken through the US$3, mark for the first time since Oct 27, and stayed above the level so far. This coincides with the data released by the World Bureau of Metal Statistics (WBMS) on the same day, which showed persistent shortages in the refined zinc market. According to the International Lead and Zinc Study Group (ILZSG), the deficit aggravated to 23k tons in 1H17 from 197k tons in 1H16. We have shared in our report on 1 Aug (Korea Zinc: Turning waste into value by recycling) that the deficit in the refined zinc market was mainly caused by unfavourable treatment charges (T/C) to smelters, as the growth in refined supply (+.4% y-o-y) was much smaller than that for ore (+5.4% y-o-y) during 1H17. While concerns over tight supply remain, healthy demand on the back of better-than-expected economic conditions should buoy metal prices in general. Korea Zinc (113 KS / BUY) is expected to benefit from higher zinc prices. We have recently revised up our earnings forecasts and TP to KRW61,, which implies 17.1x FY17F P/E and 1.9x FY17F P/BV. Besides forecasts of a persistent deficit in the zinc market for this and next year, the company would benefit from cost advantages arising from its sourcing of alternative raw material through recycling mining. Global zinc market balance Mar Apr May Jun 1H16 1H17 y-o-y% Ore production 1,67 1,62 1,63 1,154 6,144 6, Refined production 1,127 1,95 1,112 1,163 6,78 6,744.5 Refined consumption 1,24 1,212 1,152 1,188 6,95 6,947.6 Balance (77.4) (116.4) (4.1) (25.) (197.) (23.) Source: ILZSG, DBS Bank LME zinc price vs. warehouse stock LME warehouse stock(r) 3,4 LME Zinc Price(L) 3, 2,6 2,2 1,8 1,4 1, ,4 1,2 1, LME zinc price vs. Korea Zinc share price 5, 4,5 4, 3,5 3, 2,5 2, 1,5 LME ZINC SPOT ($) OFF Korea Zinc share price (RHS) 1, (KRW k) Page 2

3 Nickel s better-than-expected demand and bright outlook Bottoming out nickel prices due to stronger demand in China. The spot price of nickel on LME has soared 16.3% m-o-m and 21.8% YTD to this year s highest level of US$11,64/ton on 24 Aug, before inching down to US$11,61/ton on 25 Aug. This was driven by rising demand for stainless steel and the closure of some nickel mines. The sharp recovery in Chinese nickel demand and growing optimism towards the Chinese economic outlook are the key reasons behind nickel s price rebound. Chinese stainless steel demand is expected to grow 9% y-o-y in 3Q17 after a 12.6% y-o-y decline in 2Q17, which has spurred the increase in stainless steel production and nickel consumption. Following the surge of nickel price and healthy demand growth, stainless steel prices in China have also jumped by 2.3% m-o-m for HR plates and 14.7% m-o-m for CR coils (based on Wuxi market prices). Closure of uncompetitive mines to bolster price strength. Canadian mining giant First Quantum Minerals announced in early-aug that it will put its Ravensthorpe nickel operations in Western Australia on care and maintenance from early-sep in response to the low nickel prices. First Quantum produced 23,624 tons of nickel in 216, most of which came from Ravensthorpe, and this accounts for c.1.3% of global nickel mine production. Supply/demand balance is improving but inventory remains high. After recording a 28.8k-ton surplus 4Q16, the refined nickel market returned to deficits of 39.5k tons in 1Q17 and 2.8k tons in 2Q17, according to WBMS. However, the heavy inventory built-up arising from the persistent annual surplus before 216 should be a key obstacle to continuous price gains. As of 25 Aug, LME warehouse nickel stock stood at 385.1k tons, which are still elevated compared to 158k tons at the beginning of 21. Impact of resumption of nickel ore exports from Indonesia yet to be felt, but this could boost Chinese NPI production in the mid-term. For Jan-Jul 217, Indonesia s nickel ore exports to China only amounted to slightly over 1m tons, which translate to 7% of China s total nickel ore imports. This is still insignificant compared to Indonesia s average monthly nickel ore export volume of c.3.4m tons in 213 (before the ban was imposed in early-214). However, the Indonesian government has been increasing the export quota gradually (a total of 8.14m tons approved so far this year, more than double its very first approval of 2.7m tons that was given to PT Antam). More ore availability over time could allow China to expand its NPI production. EV to lead demand growth over the long term. Furthermore, nickel is riding on the heightened interest in the battery sector for expanding electric vehicle (EV) production. For instance, Glencore, a major commodity company, expects nickel demand from EV to increase from c.6k tons at present to c.15-2k tons by 221. The optimistic demand outlook continues to draw investors attention to nickel. Chinese nickel demand is also being boosted by a massive rise in nickel use in batteries for EV, which could grow c.35-4% this year. Along with a nickel price recovery, the share prices of nickel miners in the Philippines and Indonesia have risen across the board. Nickel Asia (NIKL PM / NR) has gained the most, rising 2% w-o-w to P7.3 on 25 Aug. Page 3

4 Quarterly global nickel market balance 6 Supply Demand Balance(R) 4 Yearly global nickel market balance 2,5 Supply Demand Balance(R) , 1, (2) (4) (6) 1, 5 5 (5) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 (8) (1) LME nickel price vs. warehouse stock LME warehouse stock 35, LME Nickel Price 3, 25, 2, 15, 1, China stainless steel price (RMB/ton) China Hot Rolled Stainless Plate 6. 28, x 15mm 34 No.1 Wuxi Market Price 24, China Cold Rolled Stainless Coil 2.mm 342B Wuxi Market Price 2, 16, 12, 5, , Breakdown of global nickel consumption (first use, 216) LME nickel price vs. Nickel Asia share price Casting, 2% Batteries, 4% Other, 1% Plating, 6% 2, LME NICKEL SPOT ($) OFF NICKEL ASIA CORP (PHP) 16. Non-ferrous, 1% 18, 16, Alloy Steel, 4% Stainless Steel, 73% 14, 12, 1, , 4. 6, Source: ISSF, DBS Bank Page 4

5 Tin price remains stable despite concerns No increase in China s refined tin exports despite worries. Tin prices have retreated to US$19,65/ton on 9 June due to concerns over supply growth from China, as the Chinese government has removed the export tax on refined tin and granted permission for VAT-free processing trade to Yunnan Tin (obtained in Apr and announced in Jun), the world s largest refined tin producer. However, China s refined tin exports have yet to step up, and they instead declined 22.1% y-o-y in 2Q17. In Jun, the export volume was at mere 99 tons. Hence, LME tin prices have recovered to the monthly average of US$2,253/ton in Jul and US$2,556/ton so far in Aug. Factors constraining China s production growth. i) Myanmar s falling ore supply was expected to be the key in limiting China s refined production. Indeed, China s imports of tin ores (in gross weight), which mostly come from Myanmar, plunged by 45.1% y-o-y in 1H17. There are inherent risks, however, especially as Myanmar s tin ore output showed an unexpected 247% m-o-m increase in Jun. ii) Stricter environmental protection. Tin smelters in Gejiu of Yunnan province were asked to shut down for a week (26 Jul- 1 Aug), due to excessively high sulphur dioxide emission levels. This is the second such case for this year. Among the affected smelters are Yunnan Chengfeng, which is the world s fourth largest refined tin producer, and Gejiu Zili, the tenth biggest. In 216, these two smelters contributed to c.8.3% of global production. As such, tougher measures by the Chinese government on environmental protection could also be a hindrance to production growth in China. Threats of China s supply growth remains. We note that the deliverable stock at SHFE warehouse has shot up substantially to 1,193 tons (+322% YTD), in contrast with the LME warehouse stock which remains near the multi-decade low level, at 1,875 tons (-5% YTD) on 25 Aug. Furthermore, China s refined tin balance turned to a surplus in 2Q17 (2,964 tons), while the world market suffered shortages. As such, the fears over the release of China s supply into the global market continue to linger. We may see some Chinese stocks flowing into the global market once the international prices become more attractive (note that Chinese prices are higher at present). Tin market still remains in deficit. The global tin market was in deficits of 4,1 tons in 1Q17 and 6,257 tons in 2Q17, according to WBMS. On a q-o-q basis, the shortage was aggravated by resilient demand (+3.1% q-o-q) while supply edged up only.8%. The deficit situation is expected to remain in 217, and continues to underpin tin prices. PT Timah (TINS IJ / BUY) should benefit from favourable prices, coupled with higher production volume for the year. In 1H17, Indonesia s refined tin production increased 39.5% y-o-y or 1,2 tons to 36, tons, accounting for 19.4% of global production. This compares with a 7,1-ton (or 7.8% y-o-y) increase for China, while Malaysia s supply dropped by 2,542 tons. In 1Q17, PT Timah produced 39% of Indonesia s total refined tin output. PT Timah s share price rose on news of more concrete efforts to curb illegal mining. On 2 Aug, the Bangka Belitung governor announced that the local government would issue a moratorium on tin mining licences. The measure is expected to control illegal mining and illegal exports of tin ores in the largest tin producing province of Indonesia. PT Timah currently holds mining concessions that cover c.9% of the tin mines on Bangka island. As such, the successful reduction/elimination of illegal mining would allow it to reap the full benefits as the country s major tin miner. Since the announcement, its share price had risen 12% to Rp91 on 25 Aug. Global top 1 refined tin producers Company % change % contribution (216) 1 Yunnan Tin (China) 75,5 76,.7% 22.4% 2 Malaysia Smelting Corp (Malaysia) 3,26 26, % 7.9% 3 PT Timah (Indonesia) 27,431 23, % 7.% 4 Yunnan Chengfeng (China) 16,6 2,1 21.1% 5.9% 5 Minsur (Peru) 2,224 19, % 5.8% 6 EM Vinto (Bolivia) 12,16 13,38 7.7% 3.8% 7 Thaisarco (Thailand) 1,52 11,88 5.6% 3.3% 8 Guangxi China Tin (China) 11,1 1,984-1.% 3.2% 9 Metallo Chimique (Belgium) 8,863 8, % 2.5% 1 Gejiu Zi-Li (China) 11, 8,2-25.5% 2.4% Global total production 335,8 339,5 Source: ITRI, DBS Bank Page 5

6 China economic indicators China Fixed Assets Investment (RMB m) Source: CEIC, DBS Bank Y-o-y % (R) Fixed Assets Investment (%) (1) China Fixed Assets Investment Real estate (RMB m) Y-o-y % (R) (%) 1.8 Real Estate (1) Source: CEIC, DBS Bank China Fixed Assets Investment Infrastructure (RMB m) 1.8 Source: CEIC, DBS Bank Y-o-y % (R) Infrastructure (%) China Fixed Assets Investment Manufacturing (RMB m) Y-o-y % (R) 2.5 Manufacturing Source: CEIC, DBS Bank (%) (1) China: Manufacturing PMI (pts) SpaceKnow China Satellite Manufacturing Index 53 (pts) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 47 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Page 6

7 LME prices and warehouse stocks Aluminium LME warehouse stock(r) 3,5 LME Aluminium Price(L) 3, 2,5 2, 1,5 1, , 5, 4, 3, 2, 1, Copper 1, 9, 8, 7, 6, 5, 4, 3, LME warehouse stock(r) LME Copper Price(L) Zinc 3,4 3, 2,6 2,2 1,8 1,4 LME warehouse stock(r) LME Zinc Price(L) 1, ,4 1,2 1, Lead 3,5 3, 2,5 2, 1,5 LME warehouse stock(r) LME Lead Price(L) 1, Nickel 35, LME warehouse stock LME Nickel Price 5 Tin 35, LME warehouse stock LME Tin Price 3 3, 4 3, 25 25, 2, 15, , 2, , 1 15, 5 5, , Page 7

8 Key data Steel Last updated Change (%) Latest 1-week 1-month 3-month YTD World Price Hot Rolled 14/8/ Hot Rolled 25/8/217 4, China Price (CNY/ton) Cold Rolled 25/8/217 4, (.6) Rebar 25/8/217 4, Korea Price (KRW/ton) Hot Rolled 25/8/ Raw Material Price China Inventory U.S. Steel Scrap No 1 HMS 14/8/ Korea Steel Scrap Busheling A (KRW/ton) 25/8/ % Fe Iron Ore (CFR Qingdao) 25/8/ (.6) Hard Coking Coal (FOB Australia) 25/8/ (6.5) Hot Rolled 25/8/217 2,145 (2.1) (3.8) (18.7) 1.4 Cold Rolled 25/8/217 1,164 (.6) 1.3 (12.3) 25.6 Rebar 25/8/217 3, (7.) (13.2) Plate 25/8/ (.5).1 (11.6) 12. Iron Ore 25/8/ ,45 (1.3) (5.) (1.9) 17.1 Utilisation Rate (%) U.S. Steel Capacity Utilisation 21/8/ (1.1) Last Change (%) Monthly updated Latest 1-month 3-month 1-year YTD Utilisation rate (%) Crude Steel Production Import/Export China China's Blast Furnaces Utilisation 31/5/ (7.5) WSA Steel Capacity Utilisation 31/7/ (1.2) (2.) World 31/7/ , China 31/7/217 74, South Korea 31/7/217 6, United States 31/7/217 7, European Union 31/7/217 13,655 (3.9) (4.9) Other Europe 31/7/217 3, India 31/7/217 8, (.4) China Steel Exports 31/7/217 6, (32.4) (1.8) China Steel Imports 31/7/ (13.3) (9.3) (13.3) (17.7) China Iron Ore Imports 21/8/217 14, (9.6) (8.8) (25.3) China Coking Coal Imports 21/8/217 5,578 (3.7) (34.1) 25. (4.9) Korea Steel Exports 31/7/217 3, Korea Steel Imports 31/7/217 1,731 (19.) (19.4) (28.5) (16.5) Finished Steel Output 3/6/217 97, (3.1) 1.9 Steel Apparent Consumption 27/8/217 68, Steel PMI (Pt) 31/7/ Source: Bloomberg Finance L.P, Steel Daily, DBS Bank Page 8

9 Key data Non-ferrous metal LME Spot Price Comex Price (US$/oz) LME Warehouse Stock (ton) Non-Commercial Combined Positions (contracts) Last updated Change (%) Latest 1-week 1-month 3-month YTD Aluminium 25/8/217 2,97 (.4) Copper 25/8/217 6, Zinc 25/8/217 3, Lead 25/8/217 2,342 (2.) Nickel 25/8/217 11, Tin 25/8/217 2, (2.) Gold 25/8/217 1, Silver 25/8/ (1.1) 7.9 Aluminium 25/8/217 1, (3.9) (1.1) (4.1) Copper 25/8/ (11.2) (21.) (25.1) (25.3) Zinc 25/8/ (.7) (7.9) (26.7) (42.4) Lead 25/8/ (4.4) (19.2) (24.) Nickel 25/8/ Tin 25/8/ (3.6) (13.) (9.) (49.9) Gold 22/8/ , Silver 22/8/217 43, (25.4) ETF Holdings (t oz) Gold 25/8/ (.7) 6.5 Silver 24/8/ (.3) (2.2) (.9) 2. Key data Macro Currency Korea Last updated Change (%) Latest 1-week 1-month 3-month YTD DXY Index 25/8/ (.7) (.9) (5.1) (9.6) USD/CNY 25/8/ USD/KRW 28/8/217 1, S&P5 Index 25/8/217 2,443.7 (1.2) S&P5 Steel 25/8/ (4.8) (5.9) (8.1) KOSPI Steel 28/8/217 1,132 (.) Index Baltic Dry Index 25/8/217 1,29 (4.) Last Change (%) Monthly updated Latest 1-month 3-month 1-year YTD China Korea World Shipbuilding (k CGT) PMI 31/7/ (.6) Satellite Manufacturing Index 31/8/ Real Estate Climate Index 31/7/ Real Estate Average Sales Price Beijing (RMB/m 2 ) 31/7/217 48, Fixed Assets Investment (Cumu) YoY 31/7/ N/A N/A N/A N/A FAI Real Estate (Cumu) YoY 31/7/ N/A N/A N/A N/A FAI (Cumu) YoY- Infrastructure 31/7/ N/A N/A N/A N/A FAI Manufacturing (Cumu) YoY 31/7/ N/A N/A N/A N/A PMI 31/7/ (2.) (.6) (2.) (.6) Construction orders (m KRW) 3/6/217 12, (.4) (35.9) Construction completed (m KRW) 3/6/217 12, (8.2) Automobile production (number) 31/7/ ,423 (3.) (2.9) 3.1 (9.5) Automobile exports (number) 31/7/ ,644 (5.3) (6.2) 3.4 (2.5) Orderbook 1/8/217 74,695 (2.7) (4.5) (24.4) (15.6) New order 31/7/ (62.7) (41.5) (2.) (26.7) Source: Bloomberg Finance L.P, Clarkson Research, KAMA, DBS Bank Page 9

10 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1% for large caps) HOLD (-1% to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -2% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 3 Aug 217 8:3:6 (SGT) Dissemination Date: 3 Aug 217 8:5:4 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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