Metals & Steel
Time to look at upsides; top
picks: Xstrata & ArcelorMittal
Commodity forecast revisions: Our global team has
revised its quarterly commodity forecasts — the most
significant upgrades are to forecasts for copper and
coal; there are downgrades in aluminium and zinc.
Copper and coal (thermal and coking) are our top
picks amongst commodities: The strong long-term
fundamentals of copper have been well-recognized by
the market, and the price has held up exceptionally well
and is above marginal cost. The medium-term outlook
for coal (thermal and coking) has improved significantly,
with China becoming a material net importer. We are
also constructive on the outlook for the platinum group
metals and have significantly upgraded price forecasts.
Stock distinction will become more important as
volatility subsides: With a 1.8 beta to the market,
calling the sector has effectively been a market call over
the last year. But as the economic outlook stabilizes, we
expect the sector beta to fall back to 1.2-1.3 (historical
average, but still the highest in the market) and
intra-sector stock performance differentials to widen.
Xstrata our top pick across the sector, ArcelorMittal
still preferred in steel: The upgrades to coal and
copper forecasts reinforce our conviction in our top pick
Xstrata (which also has an asset reorganization-led cost
programme that could add 30% to the current share
price without commodity prices moving). ArcelorMittal
remains our top pick in steel, because of the stock’s
large spot market exposure, potential volume uplift, cost
reduction potential and large US exposure (the earliest
of the western markets to restock), though we fear that
market expectations of a significant recovery have risen
too fast, limiting the upside surprise potential in steel.
Move Lundin Mining to EW (from UW), Kazakhmys
to EW (from UW) and Kloeckner to OW (from EW):
based on their relative risk/reward profiles versus the
other stocks in the sector.