What’s New

Recent increases in nickel and aluminium prices have been spurred on mainly by supply side cuts that could bring these formerly oversupplied metals into balance sooner than we had expected. Indonesia has remained steadfast in its ban on ore exports, which China relies on for roughly half its supply of nickel. Westernworld aluminium producers continue to cut production,led by Alcoa,while consumption growth continues to surge in the transportation and consumer segments, particularly in the US. China Coal (1898 HK; HKD4.53; SELL) announced it received a notice of continuing suspension of environmental tax from Shanxi’sdepartment of finance. Shanxi is providing support to coal producerswho are under severe margin pressure due to the fall in coal prices.We estimate the tax waiver will reduce production costs by 5% for coal producers in the province. We had assumed the Shanxi tax would be eliminated at the same time that the national coal resource tax is added, which could be later this year.

What’s Our View

For nickel exposure,our top regional picks are Nickel Asia (NIKL PM; PHP21.25; BUY) and Vale Indonesia (INCO IJ; IDR3,165; BUY). For aluminium plays in China, we prefer high leverage exposure in the form of Chalco (2600 HK; HKD3.16; BUY). For lower leveraged aluminium exposure,investors may want to consider low-cost producer Hongqiao (1378HK; HKD5.25; Not Rated). Steel sectorprofitabilityislow and demand is slowing,putting further pressure on producers to rationalize output. But steel producers need to make salesto generate cash to service debt. We see steel prices trending lower in line with raw material costs. We recommend selling into the any seasonal sector strength. Our top SELLis Angang (347 HK; HKD5.20).

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