Nomura Alpha Miner - JRJpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/8/7/1e8c49fb-78f3-421e-… · Base...

Research analysts

Americas Metals and Mining

Curt Woodworth, CFA - NSI [email protected] +1 212 298 4599

Alexander M. Burnes - NSI [email protected] +1 212 667 1561

Damian Karas - NSI [email protected] +1 212 298 4769

Nomura Alpha Miner

EQUITY: AMERICAS METALS AND MINING

Alcoa Downside Risks Loom

Downside Risks to Aluminum and Premia Values Grow as Supply Growth Accelerates in 2H-14

Focus Article – Alcoa at Risk from Aluminum and Packaging Weakness We believe Alcoa shares have downside risk in the short run, owing to a combination of expected price weakness in aluminum, continued weakness in spot alumina, and continued inability for auto sheet growth to offset sharp contraction seen in packaging (negative avg. organic growth of 8% last 3 quarters), which is three times the size of AA automotive. In this report, we outline our bearish short-term views on the aluminum market and stress that, while the non-China market is back in deficit following six years of surplus, there remain significant LME and off exchange stocks which have risk of shifting into the physical market as carry trades eventually unwind. We see the global market in surplus through 2015 and note the smelter cuts have driven the alumina market into greater oversupply causing weakness in spot prices which is expected to remain into 2015. With AA trading at its highest forward EBITDA multiple in a decade (ex GFC), at 8.7X 2015E EV/EBITDA, we believe the risk / reward is becoming increasingly skewed to the downside.

Aluminum Short-Term Correction Likely while Alumina to Stay Weak We believe aluminum’s recent rally is overdone and see the metal correcting back towards $0.82/lb in the coming months. Recent LME data indicate much of the rally has been driven by short-covering, while the recently introduced LME Commitment of Traders Report (COTR) shows money managers are currently net long aluminum. We also see aluminum raw materials remaining weak through 2015, as we believe China has adequate bauxite stocks for at least the next 18 months, while the alumina market is likely to remain over-supplied as smelter curtailments to date haven’t been matched with cutbacks to refinery capacity, particularly in the Atlantic Basin.

Financing Trade Economics Reaching an Inflection Point We see growing risk that the economics of financing trades could start to erode, resulting in unwinding of these trades. The recent flattening in the forward curve, potential changes in LME load out rules following their appeal, and higher interest rates suggest more metal could shift out of the LME and into the physical market, which would be bearish for physical premia as well as primary prices, in our view.

Upcoming Catalysts and Look Ahead Thermal Coal - Rail performance as well as natural gas and API2 pricing

will likely drive near-term domestic price action. The absence of hot August/Sept weather could yield further stockpile increases by year-end.

Met Coal – US East Coast and Queensland ports statistics should hit this week. Additional production cuts are likely in 3Q. Focus will remain on the Chinese SOEs supply-side strategy.

Base Metals – China’s trade data will be released tomorrow. We look for copper imports to moderate owing to difficulty obtaining LCs in the wake of the Qingdao scandal. We also expect continued growth in ali exports as China displaces its surplus to Western markets.

Global Markets Research 7 August 2014

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Nomura Alpha Miner 7 August 2014

2

FOCUS ARTICLE Short-term Downside Risks to Ali We see downside risk to AA’s shares in the short run, owing to a combination of expected price weakness in aluminum, continued weakness in spot alumina, and the inability for auto sheet growth to offset sharp contraction seen in packaging. In this report, we outline our bearish short-term views on the aluminum market and stress that, while the non-China market is back in deficit following six years of surplus, there remain significant LME and off exchange stocks, which have risk of shifting into the physical market as carry trades eventually unwind. We see the global market in surplus through 2015 and note the smelter cuts have driven the alumina market into greater oversupply causing weakness in spot prices which is expected to remain into 2015. With AA trading at its highest forward EBITDA multiple in a decade (ex GFC), we believe risk / reward is becoming increasingly skewed to the downside.

Global Supply-Demand Remains Firmly in Surplus

We believe the most important determinant of medium- and longer-term aluminum prices will be how quickly global stock levels are drawn down. While demand in the US and Europe has been relatively strong in 2014, we believe production growth in the Middle East, India and China will offset smelter cutbacks announced in 2013 and 2014. While we forecast markets ex-China in deficit in the coming years, the global surplus should remain large at around ~500-1000kt in 2014 and 2015, resulting in continued build of global stocks, in our view. We therefore see lower all-in prices as necessary to drive aluminum values to levels that would incent high cost producers to close production.

China’s Smelters Restarting Production Faster than They Closed It Continued smelter production growth in China’s northwestern provinces (mainly Xinjiang) coupled with recent capacity restarts raise the likelihood of prolonged Chinese surplus. Sharply higher aluminum prices in recent weeks and the return of power tariff subsidies in many provinces have already resulted in a handful a capacity restarts. SHFE aluminum has rallied 5% since early July, leaving many curtailed Chinese smelters back in the money at current spot prices. Note the middle of China’s C2 cost curve is relatively flat, indicating minor changes in price should translate to a meaningful supply response. The return of power subsidies in Guizhou, Gansu and Henan has also encouraged smelters to restart; capacity of more than 370kt across the three provinces has already been slated for restart, according to WoodMac.

Fig. 1: China’s aluminum cost curve is relatively flat at the middle of the curve, underling the potential of a significant supply response on higher prices China C2 Aluminum Smelter Cost Curve, $/t

Source: WoodMac, Bloomberg, LME, Nomura research

Fig. 2: Nearly all of China’s cutbacks have been temporary curtailments China Capacity Closures, Mtpa

Source: WoodMackenzie

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

0 5,000 10,000 15,000 20,000 25,000

C2

Ca

sh C

ost

($/t

)

Cumulative Production (kt)

Spot SHFE Aluminum

0.0

0.5

1.0

1.5

2.0

2013 2014

Ch

ines

e C

losu

res

/ Cu

rtai

lmen

ts (M

t)

Permanent Closure

Temporary


3

Middle Eastern and Indian Supply Growth to Add ~1.3Mtpa by 2016 Despite ex-China smelter closures and curtailments totaling 1.8Mt and 2013 and 2014, greenfield production growth in the Middle East and India should result in overall positive ex-China production growth in 2014 and 2015. Ramp-up of new, low-cost integrated smelting capacity at both Ma’aden (740kt) and Tawelelah (+500ktpa) is nearly complete, based on recent IAI data, and significant output growth is expected to continue in the coming years. WoodMac estimates Middle Eastern smelters will add another ~600ktpa by the end of 2017, or roughly 1.3Mtpa above 2013 production levels. Indian smelters should account for the majority of ex-China incremental production in 2015, with Hindalco and Vedanta expected to bring on ~1Mtpa of greenfield capacity next year and roughly 1.7Mpta between 2013 and 2017, according to WoodMac.

Sustained Market Deficit Necessary to Rebalance the Market We forecast the global aluminum surplus at 1.1Mt in 2014, falling to 835kt and 721kt in 2015 and 2016, respectively; during the same period, we expect markets ex-China to be in deficit between ~500kt and 820kt. However, we note that given the size of reported global stockpiles at around 90 days of supply compared to historical averages closer to 60 days, as well as the fact that most of these stockpiles are outside of China, we believe a sustained deficit is needed to rebalance the market.

Limited Cost Support from Aluminum Raw Materials

Indonesian Bauxite Ban to Have Muted Impact on Near-Term Market Fundamentals We don’t expect Indonesia’s bauxite export ban to have a material impact on Chinese near-term output, as China’s coastal refineries aggressively built bauxite stock ahead of implementation of the ban and currently appear well-supplied for the next 18 months. According to WoodMac, China’s imported bauxite stockpiles totaled ~47Mt at the beginning of the year, or ~70 weeks of supply, and we believe at the end of June were around 60 weeks of supply. At this rate, we believe refineries’ stocks of imported bauxite will drop to 51 weeks of supply by the end of the year and to 33 weeks by the end of 2015, still comfortably above historical levels.

Coastal Alumina Production Indicates Little Indonesia Impact So Far Year-to-date alumina production data help confirm the muted impact the ban has had on China’s alumina industry so far. Refineries in Shandong province (~25% 2013 output) rely almost entirely on imported bauxite, and we note that 1H-14 production in this province is actually up 3% y/y despite the ban. Total 1H-14 Chinese alumina production is up 7% in y/y, with the majority of the growth coming from China’s northwestern provinces.

Fig. 3: Total China alumina production as well as coastal output (Shandong) remains strong despite the Indonesian export ban Alumina Production - China Total and Shandong Province

Source: Bloomberg, Antaike, Nomura research

500

600

700

800

900

1,000

1,100

1,200

2,000

2,500

3,000

3,500

4,000

4,500

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13

Shandong (kt)Total (kt)


4

Global Alumina Market to Remain Oversupplied Alumina and aluminum prices have decoupled since the start of the year – tighter ali fundamentals ex-China have pushed all-in primary prices higher, while oversupply has resulted in downward pressure on SGA. While Pacific Basin SGA markets are relatively tight, Atlantic Basin SGA remains well oversupplied in our view, and we expect this to worsen in 2H14 owing to improved production at Atlantic-based facilities coupled with the significant smelter capacity closures announced in 2013-2014. WoodMac notes that stronger operational performance at key refineries should drive Atlantic Basin annualized output +1.2Mtpa in 2H14, while note that ~1.3Mtpa of Atlantic smelter curtailments have been announced in 2013-2014, implying ~2.6Mpta of bauxite supply freed up. WoodMac estimates that the Atlantic alumina market will be in surplus of 2.9Mt in 2014 compared to deficit of 2Mt in the Pacific basin, resulting in overall global balance of 962kt.

Fig. 4: Alumina prices relative to Aluminum have sharply weakened since the start of the year Historical Alumina Prices, Alumina as a % of Aluminum

Source: Bloomberg, LME, MetalBulletin, Nomura research

Fig. 5: Alumina prices are 5% weaker YTD while all-in aluminum is up 33% All-in Alumina Price vs. Alumina Price

Source: Bloomberg, LME, MetalBulletin, Nomura research

Raw Materials / Aluminum Price Divergence Cannot Last Alumina inventory levels have continued to increase and now stand at 64 days, above 2009 recession levels. As a result, alumina spot prices have moved lower despite the recent rally in the aluminum market and are expected to remain weak until more refinery capacity is taken offline. We believe part of the strength in primary aluminum prices has been driven by expectations that aluminum raw materials markets would tighten, so we now believe it’s only a matter of time before the market is forced to balance significantly looser raw materials fundamentals against higher primary aluminum prices.

Economics of Financing Trades Reaching an Inflection Point?

We believe higher interest rates, a narrower contango, and downside risk to physical premiums pose a threat to the profitability of financing trades. Given inventory locked up in these deals accounts for a major portion of reported stocks, as evidenced by LME cancelled warrants at nearly 60% of total stocks, the scale of potential financing trade unwinds is likely to have a major impact on the market.

Financing Trade Unwinds Could Unlock Large Amounts of Inventory In a typical financing trade, the trader first buys aluminum from a producer, paying the LME spot price plus a physical ingot premium, and simultaneously sells forward this metal at a future LME price, realizing the contango as profit. The trader also pays warehousing and insurance costs to store the metal as well as interest on the loan to purchase the metal; offsetting these costs, the trader may receive an incentive payment from the warehouse to attract metal to their facility. The profit calculation for a general financing trade is as follows:

Profit = LME Contango – Financing cost – Rent / Insurance cost + Warehouse incentive +/- Change in physical premium

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

250

270

290

310

330

350

370

390

Aug-11 Dec-11 Apr-12 Aug-12 Jan-13 May-13 Sep-13 Jan-14 Jun-14

LM

E S

po

t A

lum

ina

-$

/t

Alumina - $/t fob Australia

Alumina % of Aluminum

12 per. Mov. Avg. (Alumina % of Aluminum)

300

310

320

330

340

350

360

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14

Alu

min

a -

$/t

sp

ot

fob

AU

s.

LM

E S

po

t A

lum

inu

m -

$/t

All-in Ali Price $/t Alumina - $/t fob Australia


5

Given the large amount of metal being locked up by financing trades, we’d expect any material change in profitability to result in fewer trades being reestablished at the end of the contract. While physical premiums are at or near record levels, we expect as new LME rules eventually come into effect and carry trades become less compelling, the ability for large traders to cancel warrants and impact premia levels will diminish.

Interest rates: US interest rate expectations have risen over the past six months, with recent economic data helping confirm the view of a more significant acceleration of economic growth since last year. While last week’s FOMC statement did not indicate any change in policy or increased likelihood of sooner interest rate increases, Nomura economists view recent economic progress as bringing the FOMC closer to raising short-term rates (see their full note here). As interest rates rise over the next two years, the cost of financing these trades will become more expensive, eroding their profitability and thus reducing the willingness of traders to roll them over.

Fig. 6: Interest rate expectations in the US have been pulled forward over the past six months Fed Funds Rate Futures

Source: Bloomberg, Nomura research

Fig. 7: Accumulation of LME stocks has coincided with large increases in metal stored on the LME LME Stocks and Interest Rates


Narrower LME Contango: Traders benefit from a wider contango of the forward curve, given every financing trade principally revolves around a spot purchase and a matched forward sale. The rally in aluminum has been more pronounced at the front end of the curve, which has flatted the contango. The LME 12m-cash contango has fallen from ~$130/t at the start of the year to around $60/t most recently, making financing trades less profitable by a similar amount all else equal. Compression of the aluminum contango has been driven by tighter supply ex-China, which is in part a function of elevated levels of canceled warrants. Fig. 8: LME contango (12m-cash) has deteriorated sharply since the start of the year… LME Aluminum Contango, 12m-Cash, $/t

Source: Bloomberg, LME, Nomura research

Fig. 9: … Driven by upward pressure to the front-end of the curve by tighter availability and stronger demand LME Aluminum Curve: Current, -1M, and -3M

Source: Bloomberg, LME, Nomura research

0.00

0.50

1.00

1.50

2.00

2.50

Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

%Current 3 Months Ago 6 Months Ago

0%

1%

2%

3%

4%

5%

6%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-02 Oct-03 Jul-05 Apr-07 Jan-09 Oct-10 Jul-12 Apr-14

Fed

Fund

s R

ate

LME

Inve

ntor

y (M

t)

LME Aluminum Inventory Fed Funds Rate

50

70

90

110

130

150

170

Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14

$/tContango 30 per. Mov. Avg. (Contango)

1600

1700

1800

1900

2000

2100

2200

Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

$/t 1Y Trading Band Current 3 Months Ago 1 Month Ago

http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=690937&appname=GRP&cid=U1NBdkhPSEYxbGs90�


6

Downside Premium Risk: Physical premiums in Europe, Japan and the US are at or near record levels, which has supported profitability of financing trades, as an increasing premium effectively boosts the net contango the trader receives during the course of the trade. However, we see the potential for premiums to start to decline as more material is delivered off exchange to capitalize on stronger premia and ease physical tightness. Furthermore, the UK Court of Appeals is expected to decide on the LME’s appeal in September, and we note that Reuters has reported that LME has contingency plans for whether they win or lose the case. If successful, the LME is expected to provide a three month notice to warehouse operators of the load in load out rule changes. If LME loses, we expect the exchange to launch a new consultation, which would be fast tracked and potentially implemented in 2015. Fig. 10: Physical premiums are at or near record levels and are at risk of declining Regional physical premiums, US Midwest, Europe and Japan

Source: CRU, Bloomberg, Metal Bulletin, Nomura research

Alcoa Shares Overvalued Against Weak Ali Backdrop

With AA trading at its highest forward EBITDA multiple in a decade (ex GFC), at 8.7X 2015E EV/EBITDA, we believe the risk / reward is becoming increasingly skewed to the downside. We believe this valuation reflects significant optimism around the downstream automotive opportunity and improved aluminum fundamentals, and hence we believe its shares are at risk of a correction following their recent strong run.

It’s Not Time to Ignore Can Sheet Just Yet While we are bullish on the auto opportunity set for Alcoa, we believe most investors don’t realize the packaging segment today is three times the size of automotive and is facing significant downside pressure. US domestic can sheet market fundamentals are some of the weakest globally, as the market remains oversupplied and demand is weak, while imports of Chinese can stocks have accelerated over the past twelve months.

0

5

10

15

20

25

0

50

100

150

200

250

300

350

400

450

Mar-06 Nov-07 Jul-09 Mar-11 Nov-12 Jul-14

Pre

miu

m (U

Sc/

lb)

Pre

miu

m $

/t

Europe ($/t) Japan (CIF, $/t) US Mid-West


7

Fig. 11: Chinese semis exports have been robust Chinese Semi-Fabricated Exports (kt) and y/y % Change

Source: China Customs, Bloomberg, Nomura research

Fig. 12: April US Chinese can stock imports was a record US Can Stock Imports from China, kt Annualized

Source: US ITC, Wood Mackenzie, Nomura research

Weak Packaging Markets Will Continue to Weigh on GRP These factors have resulted in substantial price pressure and volume weakness, which has been evident in ATOI performance in GRP (of which 43% is packaging revenue based) over the past several quarters as well as Alcoa’s packaging organic revenue growth numbers. Over the past three quarters, third-party revenue growth in packaging has declined 8% compared to automotive growth of only 5%. Keep in mind that TTM packaging revenue ~packaging is $2.9bn, while Alcoa projects that auto sheet revenue will reach $580mm in 2015 from a base of $229mm in 2013. At the recent organic growth rate of negative 8%, Alcoa’s packaging revenues are set to decline by ~$220mm this year relative to the organic potential outlined in automotive of $350mm over the next two years.

Fig. 13: AA’s Packaging revenue has contracted y/y for the past six quarters… Alcoa Packaging Revenue y/y % Change

Source: Company data, Nomura research

Fig. 14: Resulting in weak GRP ATOI growth rates, which peaked at the end of 2012 Alcoa GRP Segment ATOI Y/Y %


While automotive sheet margins are forecast to be ~2x higher than can sheet, we still believe that weakness of the latter should not be overlooked as an offsetting factor. The automotive margin potential is unclear, as evidenced by recent performance in GRP. Despite ~$100mm of projected revenue growth in 2014 from auto sheet, AA has experienced y/y declines in ATOI of 15% so far this year, while their 3Q outlook for the segment suggests limited incremental benefit from the ramp up of its automotive sheet oriented Davenport facility.

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350

400

Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14

y/y %Kt

0

5

10

15

20

25

30

35

40

45

50

Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14

ktCan Stock Imports from China

12 per. Mov. Avg. (Can Stock Imports from China)

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14

Pack

agin

g R

even

ue Y

/Y %

AA Packaging Revenue y/y %

-125%

-75%

-25%

25%

75%

125%

175%

4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14

GR

P A

TOI

Y/Y

%

GRP ATOI y/y %


8

Fig. 15: Aerospace revenue growth rates have also slowed over the past two quarter Alcoa Aerospace Revenue Y/Y %


Fig. 16: However, ATOI continues to growth healthily, driven by greater contribution of value-add products Alcoa EPS Segment ATOI Y/Y %


-5%

-3%

-1%

1%

3%

5%

7%

4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14

Aer

ospa

ce R

even

ue Y

/Y %

Aerospace Revenue y/y %

0%

5%

10%

15%

20%

25%

4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14

EPS

ATO

I Y/

Y %

EPS ATOI y/y %


9

EQUITY OVERVIEW

Fig. 17: Ranked Long / Short Calls

Source: Nomura research

Fig. 18: Indexed 1-Year Sector Average Share Price Performance


Fig. 19: Sector Ranked 2014E EV/EBITDA

Source: Company data, Nomura estimates

Fig. 20: Sector Ranked 2014E FCF Yield

Source: Company data, Nomura estimates

Fig. 21: Nomura Comp Table

Source: Company data, Bloomberg, Nomura estimates Note: Closing prices as of July 6, 2014.

Upside: 17%Target: $43



Downside: -17%Target: $13



Short #3: ACI

Short #2: AA

Long #1: FCX

Long #2: X

Long #3: CNX

Short #1: BTU

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Aug-13 Sep-13 Nov-13 Jan-14 Feb-14 Apr-14 Jun-14 Jul-14

Ind

exed

1 Y

ear

Per

form

ance

%

Base Metals Iron Ore Coal Steel

0.0x

5.0x

10.0x

15.0x

20.0x

EV/EBITDA

-45%

-35%

-25%

-15%

-5%

5%

15%

25%

FCF Yield

2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015EBase Metals & Bulk MaterialsAlcoa $16.44 Neutral $12 0.53 0.66 2,798 3,016 9.4x 8.8x -2% 2%Cliffs Natural Resources $17.15 Buy $18 0.16 0.05 739 737 7.2x 7.2x -14% 10%Freeport McMoRan $36.70 Buy $43 2.25 2.70 8,911 9,860 6.4x 5.8x -7% -3%Teck Resources $23.64 Neutral $27 1.02 1.19 2,373 2,533 8.1x 7.6x -4% -3%Vale $14.01 Buy $20 1.62 1.80 16,287 18,137 5.7x 5.1x 3% 0%

Coal ProducersAlpha Natural Resources $3.70 Neutral $4 (1.83) (2.63) 200 253 19.4x 15.3x -49% -20%Arch Coal $3.17 Neutral $3 (1.77) (1.30) 272 397 17.7x 12.2x -33% -22%CONSOL Energy $39.92 Buy $48 1.23 1.91 1,117 1,417 10.9x 8.6x -4% -2%Peabody Energy $15.71 Neutral $13 (1.13) (1.12) 751 847 12.9x 11.5x -7% -6%Walter Energy $6.23 Neutral $5 (6.80) (3.70) 47 195 63.3x 15.3x -65% -38%

US Steel ProducersAK Steel $9.27 Neutral $7 0.04 1.25 368 625 15.1x 7.5x -32% 20%NUCOR Corp $50.63 Buy $56 2.10 3.60 1,968 2,755 9.9x 7.1x 4% 9%Steel Dynamics $21.51 Buy $28 1.28 1.95 805 1,095 8.2x 6.0x 5% 11%U.S. Steel $34.78 Buy $40 3.05 3.34 1,367 1,667 6.0x 5.0x 26% 9%

EV/EBITDA FCF YieldCompany Share Pric Rating Target

EPS EBITDA


10

BASE METALS

Fig. 22: Market Overview

Fig. 23: Base Metals Market Overview

Source: Bloomberg, LME, CRU, Nomura research

Major drivers this past week:

•

•

•

Focus for the week ahead:

•

Top equity idea:

•FCX remains our top pick for its strong organic growth pipeline; we also look for FCX to divest non-core oil & gas assets in 2014 beside Eagle Ford, likely generating an additional $2-3bn in capital used to pay down debt. We believe that FCX capital risk to a smelter build is relatively low owing to interest in Chinese partners and domestic companies in Indonesia.

FCX resumed concentrate exports this week, shipping 10kt to a Chinese smelter on Wednesday. Seperately, the Indonesian goverment announced that it would lower export taxes on concentrate exporters that commit to building smelters, which critically does not pertain to nickel and bauxite ores.

Resumption of copper concentrate exports from Indonesia (Grasberg) as well as the expected shipment of Caserones' first concentrate shipments have driven copper premiums significantly lower over the past two weeks. Since mid-July, copper premiums in Europe and Shanghai have fallen ~30% while US premiums have declined ~14% .

China trade data will be released tomorrow. Copper imports will be in focus after June imports of refined cu fell 8% y/y and 10% m/m. We believe part of this weakness was tied to the impact of the Qingdao scandal, but given the drawdown in bonded stocks during July we suspect imported cathode was again equally challenging to procure. We also look for evidence of continued strength of ali exports (+16% y/y last month), as we believe China's domestic surplus is being displaced to ROW.

LME released its first committment of traders report (COTR) on Tuesday, revealing money managers are broadly net long the six major base metals. The report will be released every Tuesday and similar to the CFTC report will be a useful gauge of market sentiment, in our view. Not surprisingly, money managers are longest zinc, with net long positioning at 21% compared to 10-12% for aluminum, copper and nickel.

Year to Date Performance % Week Over Week Performance %

Base metals stocks declined owing to weaker commodity prices across the space. TCK (-3% w/w) was the worst performer, followed closely by FCX (-3%). Alcoa also declined 2% on softer Ali pricing. Sector performance was more or less in line with the S&P 500, which traded down 2.5%. Nickel prices fell 3%, copper dropped 1%, and zinc shed 30 bps, as macro concerns spooked global markets.

Market Color

-20% 0% 20% 40% 60%

Teck

Copper

Freeport-McMoRan

Lead

DJ Commodity Index

S&P 500

Aluminum

Zinc

Nickel

Alcoa

-4% -3% -2% -1% 0%

Teck

Freeport-McMoRan

Nickel

S&P 500

Alcoa

Copper

Lead

Aluminum

Zinc

DJ Commodity Index

2013 2Q14 Jul-14 Aug-14 Spot YTD % Y/Y% M/M % W/W%Copper

LME spot price $/lb 3.33 3.08 3.23 3.22 3.21 -4% 1% -1% 1%Total exchange stocks kt 523 202 156 146 146 -60% -76% -7% -8%China bonded stocks kt 577 810 745 660 660 17% 20% -11% 0%SHFE-LME arb. $/t (50) (238) (210) (195) (147) 34% 318% 47% -24%Average LME premium $/t 131 133 129 103 102 -33% -37% -25% -22%

AluminumLME spot price $/lb 0.84 0.82 0.88 0.90 0.91 14% 15% 6% 2%Total exchange stocks kt 5,672 5,644 5,378 5,329 5,321 -6% -9% -2% 0%Midwest premium $/lb 0.113 0.188 0.197 0.199 0.199 69% 68% 2% 1%

NickelLME spot price $/lb 6.81 8.38 8.67 8.33 8.32 33% 34% -5% -1%Total exchange stocks kt 196 284 309 318 318 21% 55% 4% 2%

ZincLME spot price $/lb 0.87 0.94 1.05 1.08 1.08 16% 31% 7% 4%Total exchange stocks $/t 1,074 748 659 656 659 -29% -38% -1% 0%


11

Key Copper Charts Fig. 24: Net positioning is more neutral after short-covering starting in mid-June helped push prices +7% LME Copper Spot and CFTC Net Positioning

Source: Bloomberg, LME, CFTC

Fig. 25: The SHFE-LME import arb loss has widened in recent weeks as Chinese premiums have fallen SHFE- LME Copper Arbitrage, Shanghai spot premium, $/t

Source: Bloomberg, LME, SHFE

Fig. 26: Global physical premiums have collapsed on signs that concentrate exports will resume from Grasberg Global spot premiums, $/t

Source: Bloomberg, MetalBulletin

Fig. 27: China’s June refined copper imports fell 8% y/y, though this likely reflects the impact of the Qingdao scandal China Refined Copper and Copper Scrap Imports, kt

Source: China Customs, Bloomberg

Fig. 28: Overall stock levels continue to decline, driven by declines of China bonded stocks Global Copper Stocks. Kt

Source: LME, Bloomberg, CRU

Fig. 29: China bonded stocks continue to fall, as end users have taken material from bonded to the domestic market China Bonded Stocks, kt

Source: CRU, Nomura research

(40)

(30)

(20)

(10)

-

10

20

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

3.90

Aug-12 Dec-12 Apr-13 Aug-13 Nov-13 Mar-14 Jul-14

CF

TC

Net P

osit

ion

s ('0

00s)

Co

pp

er S

po

t ($

/lb

)

CFTC Net Position Copper Spot

0

100

200

(600)

(400)

(200)

-

200

400

Aug-13 Oct-13 Nov-13 Jan-14 Feb-14 Apr-14 May-14 Jul-14

$/t$/t SHFE - LME Arb (LHS) CIF Shanghai Spot Premium (RHS)

Open arb

Closed arb

0

50

100

150

200

250

Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Jul-14

$/tShanghai Premium Europe Free MarketSingapore Premium US Midwest

0

100

200

300

400

500

600

Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14

ktChina Refined Copper Imports China Copper Scrap Imports

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14

Sto

cks

(Kt)

Comex SHFELME Producers Stocks (WMBS)China Bonded Stocks (LHS) Change % YoY

-50%

0%

50%

100%

150%

200%

250%

0

100

200

300

400

500

600

700

800

900

Aug-09 Jul-10 Jun-11 May-12 Apr-13 Mar-14

China Bonded Stocks (LHS)

YoY % (RHS)

12 per. Mov. Avg. (China Bonded Stocks (LHS))


12

Key Aluminum Charts Fig. 30: The ali curve has flattened over the past three months, driven by tight spot availability and higher demand LME Aluminum Futures Curve

Source: Bloomberg, LME, CFTC

Fig. 31: Higher physical premiums have added ~$400/t to the LME price of ali, significantly improving the ‘all-in’ ali price LME 3M Aluminum, Aluminum "All-In" Price (LME + Premium), $/t

Source: LME, Bloomberg

Fig. 32: Global physical premiums continue to grind higher, as availability ex-China remains tight Global Aluminum Premiums

Source: CRU, MetalBulletin, Bloomberg

Fig. 33: Smelter closures / curtailments have weakened demand for alumina, leading to an oversupplied market Alumina, $/t and % of Aluminum


Fig. 34: Global aluminum stocks remain well above pre-crisis levels, though they are at multi-year lows Global Aluminum Stocks

Source: LME, Bloomberg, CRU

Fig. 35: Elevated cancelled warrants signal prevalence of financing trades that tie up ali inventory Total LME Stocks and % Cancelled Warrants


1600

1700

1800

1900

2000

2100

2200

Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

$/t 1Y Trading Band Current 3 Months Ago 1 Month Ago

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

Aug-12 Nov-12 Feb-13 Jun-13 Sep-13 Dec-13 Apr-14 Jul-14

$/tLME Aluminum 3 Month All-in Price

0

5

10

15

20

25

0

50

100

150

200

250

300

350

400

450

Mar-06 Nov-07 Jul-09 Mar-11 Nov-12 Jul-14

Pre

miu

m (U

Sc/

lb)

Pre

miu

m $

/t

Europe ($/t) Japan (CIF, $/t) US Mid-West

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

250

270

290

310

330

350

370

390

Aug-11 Dec-11 Apr-12 Sep-12 Jan-13 May-13 Sep-13 Feb-14 Jun-14

LM

E S

po

t A

lum

ina

-$

/t

Alumina - $/t fob AustraliaAlumina % of Aluminum12 per. Mov. Avg. (Alumina % of Aluminum)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14

Mt

North America LME

Asia LME

Europe LME

0%

10%

20%

30%

40%

50%

60%

70%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Jan-14 Jul-14

Can

cele

d W

arra

nt %

Inve

nto

ry (M

t)

LME Canceled LME On Warrant Total % Canceled


13

STEEL & IRON ORE

Fig. 36: Steel and Iron Ore Market Overview

Source: Platts, AMM, Bloomberg

Fig. 37: Key Steel & Iron Ore Market Data

Source: Platts, AMM, AISI, Bloomberg, Nomura research


•

•

•


•

Top equity idea:

•

Ferrous scrap prices appear poised to settle unchanged m/m in August. Initial trades for both shredded and prime scrap in the Midwest have been little changed from July levels. We believe this is slighlty stronger than market expectations and should provide some support to North American sheet prices through the rest of the summer.

AK Steel idled its Ashland furnace for the second time this year, which doesn't come as a surprise given during its 2Q14 earnings conference call the company noted the furnace was experiencing a 'chilled hearth'. A chilled hearth can pose serious damage to a furnace if the temperature drops far enough to cause the hot metal to solidify in the furnace

Iron ore destocking? Mysteel data indicate China's mills have started destocking over the past two weeks, with mills' port inventory of imported ore falling to 29 days of supply from 30 in mid July. More frequent port stock data confirm this trend, with port stocks falling 2.1mt in the same period, of which 1.6mt was attributed to mills.

We believe X and AKS will continue to outperform, as we believe US sheet prices should stay above $650/ton. In our view, US demand strength is a more important driver of US steel prices than raw materials prices cost support, suggesting that the US price premium could stay elevated relative to historical levels for longer than previous cycles.

US Steel said that it was exploring options to improve the profitability of its Canadian operations, which may include restructuring, according to a regulatory filing filed this week. US Steel Canada remains loss-making despite the improvement in overall flat-rolled markets since the start of the year.

Year to Date Performance % Week Over Week Performance %Key Points

X rallied another 5% on follow through from last week's strong earnings and bullish outlook, bringing the stock's YTD performance to +18%, best among our US steel coverage. NUE underperformed vs its peers, down 1%. Domestic HRC prices remain healthy, edging higher to $682/t.

While Fe prices were flat at $96/t, miners CLF and VALE traded down 1% and 3% w/w, respectively, as investors remain concerned with both companies' free cash flow burn.

-40% -20% 0% 20% 40%

Cliffs

Iron Ore

Scrap

Vale

HRC (Europe)

Nucor

HRC (US Midwest)

S&P 500

Steel Dynamics

AK Steel

US Steel

-4% -2% 0% 2% 4% 6%

Vale

S&P 500

Nucor

Cliffs

Iron Ore

Scrap

Steel Dynamics

AK Steel

HRC (US Midwest)

HRC (Europe)

US Steel

2013 2Q14 Jul-14 Aug-14 Spot YTD % Y/Y% M/M % W/W%Steel

US HRC $/ton 631 678 669 679 682 0% 5% 3% 2%US Rebar $/ton 659 687 676 650 650 -3% 1% -4% -3%Utilization % 77% 76% 78% 79% 79% 7% 0% 2% 0%Rebar Metal Spread $/ton 249 288 278 288 291 9% 10% 8% 5%Sheet Metal Spread $/ton 279 299 299 271 271 8% 1% -12% -7%

MetallicsPrime scrap $/ton 383 390 391 391 391 -6% 1% -1% 0%Shredded scrap $/ton 380 389 377 379 379 -9% 1% 2% 0%Merchant pig iron $/ton 411 414 411 403 403 -5% -2% -4% 0%

Iron Ore62% fines $/t 135 103 96 96 96 -29% -27% -1% -1%China domestic RMB/t 1,077 915 809 810 810 -26% -22% 1% 0%Chinese port inventory Mt 78.5 111.0 113.1 111.6 111.6 29% 45% -2% -2%


14

Key Steel Charts

Fig. 38: US sheet prices have found support at around $670/ton, though could trade higher into the fall Global HRC Prices

Source: Platts, AMM, Bloomberg, Nomura research

Fig. 39: Long product prices have tracked generally sideways through the normal summer demand lull US long product prices

Source: Metal Bulletin, Nomura research

Fig. 40: The US-foreign spread has remained at $168/ton for the past three weeks US-Global Import Arbitrage Spread, $/t

Source: Metal Bulletin, Nomura research

Fig. 41: Steel imports continue to moderate from record levels in May, with July license data pointing to -3% m/m Monthly US Steel Imports, Mt

Source: US ITC, Nomura research

Fig. 42: Utilization has remained at ~79-80% over the past three weeks, indicating flat mills are operating near capacityUS Utilization Rates, y/y %

Source: AISI, Bloomberg, Nomura research

Fig. 43: YTD Chinese steel production through June is tracking +5% y/y Chinese Daily Steel Production (Annualized), 2011-2014

Source: WSA, Bloomberg, Nomura research

500

600

700

800

900

1,000

1,100

1,200

Sep-10 Feb-11 Aug-11 Feb-12 Aug-12 Jan-13 Jul-13 Jan-14 Jul-14

$/s.ton Plate HRC CRC HDG

500

550

600

650

700

750

800

850

900

950

1,000

Jul-10 Dec-10 Jun-11 Dec-11 May-12 Nov-12 May-13 Nov-13 May-14

$/s.ton Rebar Sections Wire Rod Merchant Bar

-125

-75

-25

25

75

125

175

425

475

525

575

625

675

725

775

825

875

925

Apr-10 Dec-10 Aug-11 Apr-12 Jan-13 Sep-13 May-14

Sp

rea

d ($

/to

n)

HR

C P

ric

es

($/t

on

)

US-Global Spread US Global Average

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

y/y %mt Long Products Flat Products Pipe and Tube

Semi-Finished % y/y

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

65

67

69

71

73

75

77

79

81

Aug-12 Dec-12 Apr-13 Aug-13 Nov-13 Mar-14 Jul-14

Yo

Y %

Uti

lizat

ion

%

Steel Capacity Utilization (US) Change % YoY

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

200

300

400

500

600

700

800

900

Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13 Apr-14

y/y %Mt China Annualized Ouput y/y%


15

Key Iron Ore Charts Fig. 44: Spot iron ore has tracked around $95/t over the past six weeks despite signs of Chinese restocking Seaborne and China domestic iron ore ($/t, 62% fe), China rebar ($/t)

Source: Platts, Beijing University of Science & Technology, Antaike, Nomura

Fig. 45: Shredded and busheling scrap appear poised to settle flat m/m in August N. America domestic shredded scrap ($/t), Turkish scrap import cfr ($/t)

Source: Platts, Nomura research

Fig. 46: After restocking since mid-June, Chinese mills have started to destock again with iron ore at ~$95/t Chinese steel mill stocks (days of supply), Spot Iron Ore ($/t)

Source: MySteel, Nomura research

Fig. 47: Chinese mills have started to destock in recent weeks, though traders’ share of inventory remains high Chinese Port Stocks of Iron Ore

Source: Steelhome, Bloomberg, Nomura research

Fig. 48: Port Hedland exports to China totaled 29.2Mt in June, slightly weaker sequentially but still +21% y/y and +34% YTDPort Hedland Iron Ore Exports, Mt

Source: Port Hedland, Nomura research

Fig. 49: Australia’s share of June iron ore imports grew to a record 61%, indicating displacement of marginal producers China Monthly Iron Ore Imports, Mt


2500

2700

2900

3100

3300

3500

3700

3900

4100

4300

4500

80

90

100

110

120

130

140

150

160

Jan-12 May-12 Sep-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14

RMB/tonne$/tonne Spot Iron Ore ($/LHS) Tangshan Billet (RHS)China Domestic Rebar (RHS)

250

300

350

400

450

500

550

Aug-10 Feb-11 Aug-11 Mar-12 Sep-12 Mar-13 Sep-13 Apr-14

$/t US Shredded ($/t) Turkish HMS 1/2 (CFR $/t)

85

105

125

145

165

185

10

15

20

25

30

35

40

45

Mar-11 Sep-11 Mar-12 Sep-12 Apr-13 Oct-13 Apr-14

Sp

ot I

ron

Ore

-$/

t CF

R C

hin

a 62

% F

e

Ch

ina

Ste

el M

ills'

Iro

n O

re D

ays

of S

up

ply

Days of Supply

Spot Iron Ore (RHS)

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

0

20

40

60

80

100

120

140

Mar-13 May-13 Aug-13 Oct-13 Dec-13 Mar-14 May-14 Aug-14

%MtMills' Port Stocks Trader Port Stocks% Traders (RHS)

-10%

0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

30

35

40

Jan-09 Feb-10 Mar-11 Apr-12 May-13 Jun-14

y/y %Mt Other China YoY%

35%

40%

45%

50%

55%

60%

65%

10

20

30

40

50

60

70

80

90

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

% Aus.MtAustralia Other Brazil

India South Africa % Aus.


16

THERMAL COAL

Fig. 50: Market Overview


Fig. 51: Thermal Coal Key Data Summary

Source: Platts, McCloskey, EIA, DOE, Bloomberg, Nomura research


•

•

•


•

•

Top equity idea:

•

Thermal fundamentals continued their sharp reversal from winter, as a combination of mild weather, cheap gas, and stockpile conservation has led to a collapse in PRB prices. Depressed seaborne markets have also let the air out of bituminous coals.

We remain cautious of BTU at its current valuation, as very challenging conditions for its Australian met and seaborne thermal assets is likely to further downward earnings revisions, in our view. Peabody is trading at 13x 2014E EBITDA and 12x 2015E EBITDA.

Ambre Energy faces an August 18 permit decision regarding its proposed export terminal in the Pacific Northwest.

After several rounds of prices cuts, govt intervention induced Shenhua to raise thermal prices by Yuan 4/t, and the company plans to keep prices stable during August. Seaborne prices rallied on the news but remain near multi-year lows with Newcaste and Richards Bay trading $68/t and $70/t, respectively.

Rail performance as well as nat gas and API2 pricing will likely drive near term price direction.

EIA data showed coal consumption cooling off materially during the spring, particularly for subbit which was down 8% y/y in May. Alpha Natural says that coal stockpiles have risen to 56 days on average.


Coal stocks moved higher despite weak thermal fundamentals, as news of additional global supply cuts, including several of ANR's CAPP mines, as well as solid 2Q miner cost performance spurred a short covering rally. ACI gained 8%, followed by ANR up 7%. PRB prices sank further, falling 2% to $11.15/t. NYMEX CAPP was virtually unchanged, while seaborne thermal prices rallied on news that Shenhua was halting discounts and will keep prices stable in August.

-80% -60% -40% -20% 0% 20%

WLT

ANR

ACI

BTU

Newcastle

PRB 8800

API2

S&P 500

Capp Nymex

CNX

-5% 0% 5% 10%

S&P 500

PRB 8800

Capp Nymex

CNX

API2

Newcastle

BTU

WLT

ANR

ACI

Apr-14 May-14 Jun-14 Jul-14 Spot YTD % Y/Y% M/M %Thermal prices

PRB 8800 $/ton 13.0 13.2 12.8 11.7 11.3 -3% 15% -4%CAPP Nymex $/ton 60.4 62.7 60.5 60.3 59.8 5% 13% 0%API2 $/t 75.6 75.6 73.0 74.2 76.0 -7% 1% 4%Newcastle $/t 72.9 73.7 71.5 68.8 68.1 -20% -11% -3%

SupplyPRB Production mn tons 32.0 41.2 31.0 32.2 - 2% -11% 4%CAPP Production mn tons 10.6 12.7 10.4 9.5 - 5% -8% -9%NAPP Production mn tons 10.0 12.0 9.8 9.3 - 2% 5% -5%ILB Production mn tons 10.9 13.1 10.7 10.6 - -2% 13% 0%

Demand / InventorySubbit Consumption mn tons 29 31 - - - 0% -8% 8%PRB Days of Burn days 50 46 - - - -32% -26% -8%Bit Consumption mn tons 24 27 - - - -11% 6% 13%Bit Days of Burn days 55 51 - - - -29% -28% -7%


17

Key Thermal Charts Fig. 52: PRB spot prices correct sharply as consumption has dropped off and poor rails are causing shipment deferrals PRB 8800 and 8400 Prices, $/ton


Fig. 53: CAPP looks to test the prior $60/ton support level Nymex CAPP, ILB Prices, $/ton

Source: EIA, Bloomberg, Nomura research

Fig. 54: PRB consumption fell sharply in the spring, but EIA stockpiles were at 46 days at the end of May PRB Days of Burn and Subbit Consumption

Source: EIA, Nomura research

Fig. 55: Bituminous inventories reached 51 days as utilities prepare for coal unit retirements Bit Days of Burn and Consumption


Fig. 56: PRB production is flat y/y as rails impede shipmentsPRB Weekly Production, mn tons


Fig. 57: Expansion projects are driving ILB growth CAPP, NAPP, ILB Weekly Production, mn tons


3.0

5.0

7.0

9.0

11.0

13.0

15.0

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

$/ton PRB 8800 PRB 8400

40

45

50

55

60

65

70

75

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

$/ton Nymex CAPP ILB

15

20

25

30

35

40

45

50

40

45

50

55

60

65

70

75

80

85

90

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14

mn tonsDaysSubbit consumption (RHS) Subbit days of burn (LHS)

15

20

25

30

35

40

50

55

60

65

70

75

80

85

90

95

100


mn tonsDays Bit consumption (RHS) Bit days of burn (LHS)

6

7

8

9

10

11

12

Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14

mn tons

PRB

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14

mn tonsNAPP CAPP ILB


18

METALLURGICAL COAL

Fig. 58: Met Market Overview

Source: LME, Bloomberg Fig. 59: Met Coal Key Data Summary

Source: Platts, CRU, Bloomberg, Nomura estimates


•

•

•


•

•Top equity idea:

•

An additional ~3mt of met supply was cut, with ANR's announced closure of several West Virginia mining complexes and BTU's scaleback of Burton operations by 1.5mtpa. Since April, ~22mt of production cuts have been announced, of which we estimate 8.5mt were bound for Asian markets.

US East Coast and Queensland ports statistics should hit this week. US supply cuts should continue to manifest in the trade flow data. Aussie volumes could bounce back after dampened growth in June.

Consol remains our top pick within the coal space for its stable cash cow coal assets coupled with high production growth and efficiency improvements which should drive gas NAV uplift. High quality, low cost Buchanan production provides substantial optionality when the met market rebalances.

Rio Tinto sold its Mozambique coal assets, which include 60% interest in the Benga mine, to India's state run consortium ICVL for only $50mn after buying into the projects for $5bn in 2011. Current operations produce 5mtpa with the capacity to expand to 12mt.

More production cuts are likely in 3Q. Focus will remain on Chinese SOEs supply-side strategy.

Shanxi cut its August met coal prices by $8-11/tonne, as China's largest met producer (>100mtpa) was reportedly carrying high inventory across a wide range of coal grades.


The coal sector rallied as additional supply cuts by ANR and BTU as well as general cost improvement evidenced through 2Q earnings likely resulted in some short covering. ACI and ANR led the way, moving up 8% and 7% w/w, respectively. TCK underperformed the coal group and fell 3% owing to weakness in copper/base metals.

Seaborne met prices were mixed on the week, with Pacific Basin HCC edging slightly higher to $113.50/t, while US LV and HV-A traded down ~1%. -80% -40% 0% 40%

WLT

ANR

ACI

LV HCC Bench.

BTU

LV PCI

LV HQ HCC

LV HCC

HV A

HV B

TCK

CNX

-5% 0% 5% 10%

TCK

HV A

LV HCC

LV HCC Bench.

HV B

CNX

LV HQ HCC

LV PCI

BTU

WLT

ANR

ACI

Apr-14 May-14 Jun-14 Jul-14 Spot YTD % Y/Y% M/M %Seaborne Met Prices

LV HCC Benchmark $/t 120 120 120 120 120 -21% -17% 0%LV HQ HCC $/t 112 97 117 113 113 -15% -18% 2%LV PCI $/t 97 97 94 91 91 -16% -17% 0%

US Met PricesLV HCC $/t 118 118 117 114 114 -12% -14% 0%HV A $/t 115 115 115 113 112 -11% -11% 0%HV B $/t 108 109 108 106 106 -10% -9% 0%

SupplyUS Exports Mt 4.7 4.3 - - - -6% -2% -7%Aus. Queensland Exports Mt 12.0 12.8 12.7 - - 19% 10% -1%Canadian Exports Mt 2.7 3.4 - - - -4% 4% 27%Mongolian Exports Mt 2.1 1.6 1.9 - - -22% -15% 18%

DemandChina Imports Mt 6.5 5.9 5.7 - - -24% -20% -3%Japan & S. Korea Mt 8.5 8.8 - - - 10% 1% 3%European Imports Mt 3.6 3.6 - - - 1% 21% 0%


19

Key Met Coal Charts Fig. 60: PCI & semi-soft pricing has weakened vs HCC Pacific Met Prices


Fig. 61: Atlantic Basin prices appear to have stabilized Atlantic Met Prices


Fig. 62: China Seaborne Met Imports Are Down 12% YTD Asian Met Imports, Mt

Source: WoodMac, Platts, CRU, Nomura research

Fig. 63: But Japan, Korea and India Show Solid YoY GrowthEuropean and Indian Met Imports, Mt

Source: WoodMac, Platts, CRU, Nomura research

Fig. 64: Pace of Aussie export growth has slowed the last few months Australian Met Coal Port Summary

Source: Port Data, Nomura research

Fig. 65: ANR will close more met mines (~2mt), while BTU announces its first production cut of 1.5mt at Burton North American Capacity Cuts, Mt


70

90

110

130

150

170

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

$/tonne FOB HCC Peak Downs LV PCISemiSoft HCC Contract

100

110

120

130

140

150

160

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

$/tonne FOBUS LV HCC HV-A HV-B

0

2

4

6

8

10

12

14

16

18


Mt S. Korea Japan China

0

1

2

3

4

5

6

7

8

9

10


Mt Europe India

-60%

-40%

-20%

0%

20%

40%

60%

80%

0

2

4

6

8

10

12

14

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Yo

Y C

han

ge

%

Exp

ort

s (M

t)

Gladstone Abbot Point Dalrymple BayHay Point YoY%

0

1

2

3

4

WLT Alpha CLF VALE BTU Patriot Arch Consol Mechel

Mt


20

Appendix A-1

Analyst Certification

I, Curtis Woodworth, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating Alcoa AA US USD 16.44 06-Aug-2014 Neutral Not Rated 01-Mar-2012 Not rated Arch Coal Inc. ACI US USD 3.17 06-Aug-2014 Neutral Reduce 18-Mar-2013 Not rated AK Steel Corp. AKS US USD 9.27 06-Aug-2014 Neutral Not Rated 29-Mar-2012 Not rated Alpha Natural Resources Inc. ANR US USD 3.70 06-Aug-2014 Neutral Buy 12-Oct-2012 Not rated Peabody Energy Corp. BTU US USD 15.71 06-Aug-2014 Neutral Reduce 18-Mar-2013 Not rated Cliffs Natural Resources Inc. CLF US USD 17.15 06-Aug-2014 Buy Neutral 13-Sep-2012 Not rated Consol Energy Inc CNX US USD 39.92 06-Aug-2014 Buy Not Rated 01-Mar-2012 Not rated Freeport-McMoRan Copper & Gold Inc FCX US USD 36.70 06-Aug-2014 Buy Neutral 01-May-2013 Not rated NUCOR CORP NUE US USD 50.63 06-Aug-2014 Buy Not Rated 29-Mar-2012 Not rated Steel Dynamics Inc STLD US USD 21.51 06-Aug-2014 Buy Not Rated 29-Mar-2012 Not rated Teck Resources Ltd. TCK/B CN CAD 25.83 06-Aug-2014 Neutral Not Rated 01-Mar-2012 Not rated Vale S.A. VALE US USD 14.01 06-Aug-2014 Buy Rating Suspended 01-Mar-2012 Not rated Walter Energy Inc. WLT US USD 6.23 06-Aug-2014 Neutral Not Rated 01-Mar-2012 Not rated United States Steel Corp X US USD 34.78 06-Aug-2014 Buy Neutral 10-Mar-2014 Not rated

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 24% of companies with this rating are investment banking clients of the Nomura Group*.

http://www.nomuranow.com/research�

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx�

mailto:[email protected]�


21

As at 30 June 2014. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No : U74140MH2007PTC169116, SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034) and NIplc, Madrid Branch (‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent


http://dis.kofia.or.kr/�


22

permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Russell/Nomura Japan Equity Indexes are protected by certain intellectual property rights of Nomura Securities Co., Ltd. and Russell Investments. Nomura Securities Co., Ltd. and Russell Investments do not guarantee the accuracy, completeness, reliability, or usefulness thereof and do not account for business activities and services that any index user and its affiliates undertake with the use of the Indexes. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. The entity that prepared this document permits its separately operated affiliates within the Nomura Group to make copies of such documents available to their clients. This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or 'professional clients' (as defined by the Dubai Financial Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or ‘Business Customers’ (as defined by the Qatar Financial Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or 'professional clients' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar . By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an ‘Authorised Person’, an ‘Exempt Person’ or an ‘Institution’ in Saudi Arabia or that you are a 'professional client' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia or Qatar.


23

NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2014 Nomura Securities International, Inc. All rights reserved.


Nomura Alpha Miner - JRJpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/8/7/1e8c49fb-78f3-421e-… · Base...

Documents

Transcript of Nomura Alpha Miner - JRJpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/8/7/1e8c49fb-78f3-421e-… · Base...