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Rabu, 26 Januari 2011

Credit Suisse Asia Equity Focus Increased volatility in commodity prices throughout 2011

 Solid commodities demand outlook reaffirmed by China metal and mining companies

We have met with several Chinese metal and mining companies and got positive takeaways on the outlook of the China metal and mining sector. The Chinese metal and mining companies that we met expect the solid commodity demand to continue on the back of China's robust economic growth, which contrasts with investors concerns about the slowing economic growth momentum and policy tightening. Steel production is expected to rise on a yearly basis, despite the government's efforts to shut down excess capacity, reaffirming China's robust industry activity strength. Demand for copper and aluminum remains firm, driven by the continued urbanization, such as the development of social housing, and the investment and upgrade of the power grid in rural communities. China coal supply remains tight due to a logistics bottleneck. Coal mining companies expect the bottleneck situation to be resolved by 2013 at the earliest.

However, we see an increasing risk of near-term price consolidation after metal prices rebounded sharply and rallied to new highs. For instance, copper price has risen to a record-breaking high of USD 9700/t on the London Metal Exchange (LME). The aluminum price also climbed to USD 2250/t, which is closer to the recent year high of USD 2330/t in June 2008. On the other hand, the Qinhuangdao (QHD) thermal coal spot price remains steady at CNY 775/t, still well below the peak of CNY 995/t in 2008. That said, we have started to see some profit taking activities by speculative traders in the seaborne coal market. Seaborne thermal prices (from Australia) have fallen sharply, while coking coal prices have continued to surge on the supply disruptions caused by the tragic floods in Australia. The rainy season in Brazil may pose a new disruption to coal supply. On precious metals, the gold price has corrected on weak seasonality after peaking at USD 1431/oz. We believe the recent weakness is only seasonal and temporary. The current gold price of USD 1335/oz is outside our forecast Q1 gold price range of between USD 1400/oz and USD 1500/oz.

Furthermore, the widening negative real yield is also favorable for gold investments as a hedge against the weak USD. Thus, we remain positive on the gold price outlook, despite weak seasonality in Q1. While we remain constructive on the China metal and mining sector, we expect to see increased price volatility throughout 2011. After the recent sharp rallies, metal prices are due for a short-term consolidation. Among the different sectors, we prefer copper over aluminum, given the former's more favorable fundamentals in demand and supply dynamics. Global copper supply remains restricted due to the lack of new mine supply, while demand continues to improve with the economic recovery. We also favor the China coal sector due to the steady rise in coal prices. We favor China Shenhua (1088 HK, BUY) and China Coal (1898 HK,
BUY) due to their low valuations and solid earnings growth outlook.

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