JPM Global Mining Research Team All about metals and mining

Michael Gambardela (North America Metals & Mining) – Steel (stock) momentum turning positive. Macro headwinds show signs of abating. Concerns surrounding a stronger dollar and a slowing Chinese economy sent investors into a steel stock selling frenzy over the last two months. In addition, investors pointed toward declining Chinese prices of iron ore and steel to support their bearish views on U.S. steel stocks. On July 6th, the Wall Street Journal published a front page story about steel prices declining that

appeared to top-tick the market's bearish concerns. In our view, the market momentum is turning from ultra-bearish to bullish and recently hit an inflection point. Fears about a strengthening U.S.-dollar, a major headwind for steel and material stocks, has faded as the dollar actually declined 8% against the Euro to $1.29 after many had proclaimed that the dollar was headed to parity just six weeks ago. Recently, the market appears to be anticipating that China’s government is actually moving closer to easing and re-stimulating growth instead of continuing its tightening policies. As a result, we think the two biggest macro headwinds for steel (and materials) stocks appear to be fading.

Key steel leading indicators recently turn positive. In the past week, Chinese iron ore prices have risen 8% while Chinese steel prices have increased for the first time in two months. Scrap prices in Turkey, a major global buyer, have also been moving up recently. In our opinion, the macro and industry-specific pressures dragging steel stocks down over the past two months are now turning positive.

Nathan Zibilich (China Metals & Mining) – believes the Chinese steel industry is at a positive inflection point as 40% of the mills have cut production, and both macro and targeted economic policies that have hurt steel demand appear to be on the verge of abating or possibly reversing, which we believe will help demand. After a very painful 1H10, as elevated iron ore prices, macro tightening policies and measures targeted at the property sector in China have left many steel industry executives (and investors) feeling like they have been trapped inside the aforementioned medieval torture device (please see China Metals & Mining March 9, 2010), we believe China’s steel industry, like a trooper, is ready to storm back. Today, he assumes coverage of Maanshan Iron & Steel (O/W), Baoshan Iron & Steel (O/W), and Angang Steel Company Limited (Neutral).

Michael Jansen (Commodity analyst: metals) – In short, what the Global PMI (and associated commodity markets) have been telling us for some months continued in July; strong but softening core demand for commodities in EM has been more than offset by restocking and improving demand in the DM. In July, EM continued to soften, while DM stayed robust (and even strengthened in Europe). But Europe is not the focal point for commodity consumption growth in the medium term, it is EM countries that are driving above-long term average commodity consumption growth rates and it is these countries right now that are showing the most significant softening in implied demand, albeit from very strong levels. As such, the recent 20% plus rally in industrial metals prices looks from a pure macro perspective as moderately vulnerable on the demand side. We could and should expect base metals to gradually “rollover” in the weeks ahead.

Nickel is trading around $21,500-$22,000 currently, having broken through the $18k-$20k range that was in play over most of June and July. Overall we see the end of the Vale Sudbury strike as quite bearish for nickel but refined units are unlikely to come through en masse until Q4. That said, the consistent trend lower in LME nickel stocks over this year has drawn to a close, with total inventories rising from a low of 116kmt to around 118kmt currently. By year end we expect to see nickel stocks on LME higher, but sideways movement in the level of nickel stocks may be seen yet for a few more weeks. Moves in nickel above $22k-$24k are likely clear selling opportunities.