A Cup of Tea 01 Aug'10

BASE-METAL FUNDAMENTALS TO THE FORE?
• Global growth momentum has eased, but we see a recovery and not a double dip. We believe the global economic recovery remains on track.
• The International Monetary Fund (IMF) even upgraded its forecast for global growth this year from 4.2% to 4.6%.
• Commodities prices are being boosted by the change in sentiment with base metals in particular moving higher on the back of the improved economic outlook and demand after the latest slew of company results. The outlook for commodities is positive on a 12-month plus view.
• The shortterm negative factor came from China PMI. China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories. The Purchasing Managers’ Index fell to 51.2 from 52.1 in June, the Federation of Logistics and Purchasing said on its website today. That was less than the median forecast of 51.4.
• The slowdown seemed concentrated in heavy industry, partly reflecting a government campaign to close inefficient businesses to meet energy-saving goals. This does not necessarily reflect weakening in the underlying economic fundamentals.
• Next we must watch closely US ISM data.

Nickel
Nickel is a critical ingredient in the production of stainless steel and industrial alloys - the demand for nickel rises directly in step with the growth of emerging economies. The latest International Stainless Steel Forum (ISSF) production data suggests that the nickel market will remain in deficit for 2010 and 2011. The nickel production and sales of China nickel industry keeps growing, with the supply falling short of market demand.

Quote from China Nickel Industry Report, 2009-2010, The Nickel Industry of China is characterized as follows:
• First, China is short of nickel reserve; basic reserve of nickel reaches 7.6 million tons in China, a share of only 5% in global total
• Second, the production and sales of China’s nickel industry showed the sustained growth in recent years; in 2008, nickel output and consumption of China reached 133,000 tons and 320,000 tons respectively, with a demand gap of 187,000 tons. Then in 2009, the figures raised to 216,000 tons and 447,000 tons respectively, a growing demand gap of 231,000 tons.
• Third, China relies upon import of nickel ore and concentrates since its scarcity of nickel resources;
• Fourth, nickel price runs nearly the same in China and the world at large, and it presented the uptrend of fluctuations in the year of 2009;

INCO
INCO reported first half 2010 net profit of $218.78 million rose six fold from $34.58 million due to higher sales. A nickel deficit is likely this year because of a surge in stainless steel demand, supply constraints and falling stocks, but the shortfall is likely to narrow in 2011 as production rises.

Key Points for INCO;
• Continued to focus on increasing the efficiency of its operations
• Integrated business planning
• The Karebbe hydroelectric power generating plant project
• Higher volume production and average selling price

For medium term with better economic and ISM data I believe that the nickel price will higher gradually. I put my target for INCO was idr5145 , INCO EPS @idr 343 (from reuters) and PE’10 @15x (consensus TP was idr5800). Consensus analyst @current was Buy (9), Outperform (3), Hold (3), Underperform (1), and Sell (1).


Bang Juntri
DISCLAIMER: This report is issued by Bang Juntri. Although the contents of this document may represent the personal opinion of Bang Juntri. We cannot guarantee its accuracy and completeness.