Shortages in key commodities forecast: We recently
visited China and our optimism for commodities into
2010 has increased – we upgrade our industry view to
Attractive. We are now forecasting deeper supply-side
deficits in our favoured commodity exposures of copper,
coking coal, and iron ore, and forecast price changes
are material. We also think prices in other commodities
will remain well supported in US$ terms due to demand
and a relatively weak US$ against commodity producing
currencies. Our Commodities analyst, Peter Richardson,
has revised forecasts, as summarized in this report and
presented in detail in our publication, Morgan Stanley
Global Metals Playbook – 4Q09, October 14, 2009.
PanAust, Equinox, Newcrest, Lihir, G-Resources,
Macarthur Coal, Centennial Coal preferred: Based
on our mid-cycle earnings estimates, BHPB is trading on
a P/E of 12.8x and RIO 11.6x, compared to their
long-run average of 15.0x to 15.5x. Summary models
are in this report.
Alumina Limited, Fortescue Underweight: While we
have upgraded our price targets, fundamentally we still
see these companies as overvalued. In the case of
Fortescue, the market is factoring in volume growth that
we do not expect to be delivered in the time frame of two
years implied in the share price. For Alumina Limited,
we think the market has overestimated the potential of
aluminium and alumina prices.
Where we are different to the market: We think the
OECD restocking, in particular in the US, could add
further support in 2010 – provided a broader-based
economic recovery continues. We note that China is at
present de-stocking, and we think a re-stocking cycle
from 1Q-2010 could result in strong price reaction in
base metals and bulk commodities. Our equity
Overweight calls are above market consensus for PNA,
EQN, LGL, G-Resources and MCC.