We see a mismatch between the recent 20% share price pullback and still robust underlying real demand. We see 8 stock-picking themes emerging:
(1) Our channel checks with a low-voltage copper transformer producer indicate demand is rising, with August shipments back to 2008 peaks.
(2) Along the value chain, we do not think the market has priced in the better-than-expected speed of economic recovery, positive for upstream commodities like coal; traders indicate positive surprise on coal demand.
(3) The magnitude of demand recovery may potentially lead to tightness in commodities (such as steel) long perceived as oversupplied; this offers potential upside in undervalued stocks. Steel traders see robust demand.
(4) Economic recovery in OECD countries (which account for about 40% of global consumption) could provide an additional boost to commodity prices, which are already buoyed by strong demand from China.
(5) China’s increasing percentage of global consumption structurally boosts the sustainability of this upcycle, reducing potential OECD “double dip” risk. Our new analysis shows a 10% increase in Chinese demand now offsets OECD weakness 2-3 times as much as it did in 2002 when China first joined the WTO.
(6) Sustainability of supply-side tightness to cushion rising raw material costs; we see copper/steel/coal as favorably positioned.
(7) Consolidation leaders such as Shenhua/Angang/Baosteel could see leverage increase for the upcycle via parent asset injection, in our view.
(8) Valuations are still around/below mid-cycle, such as steel/coal names.
Source: Goldman Sachs