China metals, Steel stocks underperform commodity prices: Macquarie

BEIJING (Scrap Monster): China base metal and steel stocks have underperformed the physical commodity prices and the outlook for the second half of 2012 looks challenging, according to a report by Macquarie Research.

The report said that steel stocks are no longer driven by steel prices but changes in raw material environment. Steel companies got higher prices but margin pressures came on lagged cost impact.

Copper stocks have underperformed copper prices and both were influenced by speculation and global events, the report added.

Macquarie stated that, "The outlook for steel stocks is still very challenging. At the end of the day, steel stocks in China are really just processors or smelters with very little control over their profitability. Forecasting the earnings is increasingly difficult given the volatility in input prices and steel prices and given the impairment charges that also follow through. Fundamentally they are difficult to buy so investors need to focus on valuation opportunities with a focus on Price to Book ratios.”

Macquarie Research is bearish on both aluminium prices and stocks. 

Key Stocks
--Angang – FY12 EPS has been decreased from Rmb0.30ps to a loss of Rmb0.15ps and FY13 from Rmb0.54ps to Rmb0.16ps.. OUTPERFORM ratign with a target price of HK$7 based on a PB ratio of 0.7X, Macquarie Research said.

--Maanshan – FY12 EPS has been decreased from Rmb0.20ps to Rmb0.00ps and FY13 from Rmb0.32ps to Rmb0.08ps. OUTPERFORM rating with a target price of HK$3.50 based on a PB ratio of 0.7X.

--China Metal Recycling – FY12 EPS has been decreased by 3% and in FY13 by 6.9%. An OUTPERFORM recommendation and a HK$12.50ps target price. 

--Jiangxi Copper – FY12 EPS has been decreased by 11% and in FY13 by 11.7%. An OUTPERFORM recommendation and a HK$22ps target price based on a 10x PER. 

--Minmetals – FY12 EPS has been decreased by 13.6% and in FY13 by 13.8%. Maintains an OUTPERFORM recommendation and a HK$22ps target price based on a 8-9x PER.

--Key picks – "In the Metals segment of the market our key picks are China Metal Recycling, Maanshan and Minmetals. We also continue to like Shenhua and Qinfa and CNBM."