Metals & Steel
Top picks to play second leg
of rally: Vedanta and
Kazakhmys
Vedanta and Kazakhmys remain our favourite
stocks: With Vedanta’s stock trading at its current
capacity value, the market prices in almost ‘no value’ for
growth and cost reductions. Confirmed growth plans
over the next 24 months and further operational
improvements could lead the share price to more than
double without material changes to spot commodity
prices, we think. Kazakhmys, is one of the cheapest
stocks in our universe and is a leveraged play on copper
that could see its stub ex-ENRC re-rate in the
eventuality of a potential sale of its stake.
We also turn to bottom-up stories that have been
either overlooked or misunderstood by the market.
With Chinese steel production acting as a temporary
‘cap’ to steel prices, we prefer the risk-reward profile of
the mining sector. With the ‘plays on an economic
recovery’ having had a significant run, we believe that
the second leg of the rally will be supported through
stocks that have specific catalysts that could unlock
value. Our preference for the miners over the steels is
driven by our view that steel prices will be capped by
significant overcapacity.
Copper and coking coal remain our top picks
amongst commodities: Copper prices have held up
significantly above marginal costs and the market
continues to recognize the solid long-term fundamentals
of the base metal. Supply constraints for coking coal
have tightened sooner than we had anticipated, thus
improving the medium-term outlook. We also upgrade
short-term forecasts for nickel and zinc.
Commodity forecast revisions: Our global team has
revised its quarterly commodity forecasts — the most
significant upgrades are to our near-term forecasts for
copper, coking coal, nickel, and zinc; however, our
long-term forecasts remain largely unchanged. See
Global Metals Playbook – 4Q09, also published today.