China outcomes matter the most in 2011
China’s soft economic landing, its energy dilemmas and rising raw material needs,
QE stimulus in the US and ongoing EM strength will likely underpin a positive
materials performance. Raw materials supply should continue to surprise, as rising
costs and political turbulence delay infrastructure and new projects.
Political economy raises risks in access, ownership and taxes
Political economy impacts in many forms: China’s policy will likely drive global
materials, as it seeks greater economic balance with more consumption/services
contribution. Rising resource nationalism, stronger environmental lobbies, trade
disputes and US regulatory controls could impact prices and sentiment.
Re-leveraging: Imperative and appetite ready
With the cost of debt relative to equity the most attractive in three years, we see re-
leveraging in increased capex, up by 10-15% in 2011E, ongoing M&A (where the
‘build vs buy’ decision very much favours ‘buy’) and increased IPOs and listing,
particularly in Asia and Hong Kong. “Corporate re-leveraging cycle we believe will start to rise in 2011 as the cost of debt relative to equity is at the most attractive level in three years. Based on cash levels, the outlook for RoE, and the relative cost of capital, companies are likely to add leverage, which is apt to lead to PE multiple expansion and equity outperformance”.
Most & Least Preferred Stock Ideas for 2011
Our commodities preferences: coal, iron ore, copper, palladium, phosphate and
OCC; our least preferred: aluminium, nickel, pulp, ethylene, steel and cement. Our
favoured equities: diversified mining, US chemicals, US containerboard, Russian-
Indian steel-mining and EM cement. Our dividend fountains: UPM, International
Paper, CRH, Norilsk Nickel and SCA.
Segments preferred: Diversified mining, US commodity chemicals, US
containerboard, Russian-Indian steel-mining, EM cement
Segments least preferred: Asian commodity chemicals and steel, global
aluminium, US aggregates, global steel
Positive
Re-industrialisation of the US: We see the favourable impact of lower US$,
lowest US gas (energy) prices, strong and underemployed workforce as a driver
of US re-industrialisation. This would favour US chemical, paper and coal
companies as export potential surprisingly rebounds.
China energy efficiency drive could shift raw material trade patterns: Some
Chinese iron ore, coal, alumina and nickel processers are not competitive if
energy costs and scarcity are more transparently applied. We see potential for
rising imports in to China.
China owned company led M&A could advance aggressively in 2011:
Driven by realisation of domestic energy, cost and currency relative moves we
believe Chinese companies will be increasingly assertive and ambitious in their
offshore M&A targets. Major raw materials and agricultural companies could be
targets (fertiliser and crop protection) for large scale offshore investment and
production. We expect more lateral partnerships and equity participation with
companies such as Rio Tinto, Anglo American, Xstrata, Peabody Energy, Linde,
BASF, Akzo Nobel, Syngenta, UPM, among others.
Commodity investment to increase with more ETF and index funds: The
looser money conditions, rising concerns about supply shortages and lifting
demand will continue to support commodity asset class investment in
commodities at both in index commodity baskets and in physical holdings.
Negative
Project capital costs and operating and could surprise dramatically:
Appreciating commodity currencies, labour competition and industrial unrest,
higher energy and services costs could see costs jump 20-30% in some
industrially intense environments such as Australia as simultaneous booms in
iron ore, coal and gas compete for limited manpower and service resources.
Potential margin squeeze in non-integrated companies continue increase:
Rising raw materials prices and subdued developed world consumer demand and
pricing power could squeeze companies that are not integrated with raw
materials. Consumer chemicals and steel appear vulnerable to potential price
weakness while raw materials rise.
Global capacity expansions could surprise: Despite a concern about supply in
2011 some segments will see significant expansions. Primary chemicals such as
ethylene are still seeing 7%pa growth due to Middle East expansion. China will
increase its coated paper capacity by nearly up 33% to 3mt/y in 2011, either
driving up pulp demand or lifting Chinese paper exports onto the global market.
South Korea recently moved from being a long standing steel importer to an
exporter highlighting over capacity potential in North Asia in steel, paper and
chemicals.
China real estate property tightening measures could hurt sentiment: The prospect of a broader application of a property tax in 2011 and stricter
implementation of reforms could impact construction and steel sentiment. This
may be counter balanced with stronger public housing investment.
Резюме (?) – сильные региональные отличия, плюс сильные корпоративные отличия. Украинская сталь ближ куда: к мировой или российской? Насколько сильно интегрированные будут лучше не интегрированных?
Re-industrialisation of the US: We see the favourable impact of lower US$,
lowest US gas (energy) prices, strong and underemployed workforce as a driver
of US re-industrialisation. This would favour US chemical, paper and coal
companies as export potential surprisingly rebounds.
China energy efficiency drive could shift raw material trade patterns: Some
Chinese iron ore, coal, alumina and nickel processers are not competitive if
energy costs and scarcity are more transparently applied. We see potential for
rising imports in to China.
China owned company led M&A could advance aggressively in 2011:
Driven by realisation of domestic energy, cost and currency relative moves we
believe Chinese companies will be increasingly assertive and ambitious in their
offshore M&A targets. Major raw materials and agricultural companies could be
targets (fertiliser and crop protection) for large scale offshore investment and
production. We expect more lateral partnerships and equity participation with
companies such as Rio Tinto, Anglo American, Xstrata, Peabody Energy, Linde,
BASF, Akzo Nobel, Syngenta, UPM, among others.
Commodity investment to increase with more ETF and index funds: The
looser money conditions, rising concerns about supply shortages and lifting
demand will continue to support commodity asset class investment in
commodities at both in index commodity baskets and in physical holdings.
