China Basic Materials Monthly
COMMENT
December 2008 – inventory level in correction,
deep destocking yet to be completed

Channel checks on destocking: We believe the destocking cycle is
deeper than market expectations, but will serve as one important
demand driver for 2009. To monitor both the trend of inventory as well
as excess levels, we have been conducting channel checks in recent
months through surveys on nearly 30 producers, covering upstream
materials, such as coal and iron ore, to metal/steel producers, and to
the very downstream of demand, such as machinery, auto and white
goods. We continue to see excessive inventory days in both the very
upstream, such as coal (0.3 months of normal sales) and iron ore (0.5-
1.5 months), and the very downstream, such as machinery (one to two
months), automobiles (0.5 months by industry stats) and property
(three months by industry stats). However, overall inventory levels
have shown signs of correction, a positive leading indicator, in our
opinion, which is reaffirmed by recent China PMI data.
■ Steel – A mild recovery in spot prices as a result of production cuts.
■ Coal – Spot price stabilises, but power growth remains negative.
■ Cement– Improving prices in selected provinces, but a weak season
ahead.

Table of contents
NJA basic material stocks (Credit Suisse coverage) 2
Credit Suisse commodity price forecast 4
Monthly theme – Channel check on destocking 5
Downstream demand snapshots 7
Steel – mild recovery of spot prices as result of production cut 9
Asset-based valuation – steel 10
Valuation peers – steel 11
Share performance – steel 12
Coal – spot price stabilises, power growth remains negative 13
Asset-based valuation – coal 14
Valuation peers – coal 15
Share performance – coal 16
Cement– improving price in selected provinces, weak season ahead 17
Asset-based valuation – cement 18
Valuations – cement 19
Share performance – cement 20
Aluminium – extended trough 21
Alumina – extended trough 22
Copper – rebound in apparent consumption likely on mild restocking 23
Other non-ferrous metals 24
Asset-based valuation – gold 25
Valuation peers – non-ferrous metals 26
Share performance – non-ferrous metals 27

Monthly theme – Channel check on destocking
The poor apparent demand growth for most Chinese basic materials has been a result of both weak demand and deep
destocking – inventory draw down on not just commodities/raw materials, but also on downstream products (such as
finished property units, machinery and auto producers). The aggregated impact from destocking of the entire value chain
makes the cycle much deeper and extremely negative to apparent consumption growth. On our estimates, an excessive
one month to 1.5 months of excessive inventory would take a 17-25% haircut in apparent consumption in a typical
destocking period, leading to a three to six-months extremely negative growth environment depending on the level of the
production cuts (see table below for estimates on the impact of destocking on apparent demand growth and period of
destocking needed). Nevertheless, destocking is a double-edged sword, as the same destocking process would drive a
strong sequential improvement once the cycle ends or reverses, even in the absence of a real demand improvement, in
our opinion.
We believe investors should watch: for 1) the trend of absolute inventory changes and 2) excessive inventory days. Our
channel checks in recent months through surveys on nearly 30 producers covering upstream materials, such as coal and
iron ore, to metal/steel producers, and to the very downstream of demand such as machinery, auto and white goods.
While we continue to see excessive inventory days in both the very upstream, such as coal (0.3 months of normal sales)
and iron ore (0.5-1.5 months), and the very downstream, such as machinery (one to two months), automobile (0.5 months
by industry stats), and property (three months by industry stats), overall inventory levels have shown signs of correction, a
positive leading indicator, in our opinion, and reaffirmed by recent China PMI data.