Kotak cuts target for metals stocks citing weak demand, China stimulus plan

Kotak cuts target for metals stocks citing weak demand, China stimulus plan
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New Delhi, Jan 10: Kotak Institutional Equities slashed price target of Vedanta, Hindalco Industries and Nalco after cutting metal price forecast by 2-11 percent.
The major reasons highlighted by the research house are stimulus planning by world’s second largest economy China and likely softer demand in the current calendar year.
China is moving ahead with policies aimed at stimulating growth amid the economic slowdown.
Ning Jizhe, vice chairman of National Development and Reform Commission (NDRC), said in an interview with CCTV that the policies will be part of wider efforts to strengthen domestic consumption in China.
Investment in each of those projects could be worth billions of US dollars, he added.
Kotak said it noted that (1) China’s central bank (PBOC) will cut required reserve ratio by 0.5 percent on January 15, 2018 and additional 0.5 percent on January 25, 2018, and (2) government will accelerate the bond issuance program by the local government to boost infrastructure investment.
The current reserve ratio for large banks is 14.5 percent and for smaller banks is 12.5 percent. According to the PBOC, this cut will provide liquidity of 800 billion yuan ($116 billion).
Despite this stimulus, Kotak said it expects demand for metals to be soft in 2019 in China as well as globally.
The larger portion of global aluminium consumption is led by Europe, the US and China. Close to 80 percent of aluminium demand is from these geographies.
Kotak expects demand for metals in 2019 to be weaker than from 2018 due to slower economic growth in these large metal consuming geographies. “The slowdown in China’s real-estate and automotive sectors will result in subdued demand for metals given these sectors account for a significant portion of the overall demand.”
As per CRU, a business intelligence company, China’s aluminium demand growth will slow down to 3.5 percent in Q1CY19, from close to 5 percent growth in 2018.
“If we consider aluminium fundamentals in isolation to overall macros, it has all the ingredients for significant outlook improvement over the next 1-2 years: (1) global markets are in deficit of around 2 million tonne (in 2018) which will only get worse given the supply tightness, (2) inventories are falling—world (ex-China) inventories declined from 102 days in 2017 to 75 days and will reach equilibrium levels of around 60 days in the next 12 months,” Kotak said.
However, according to the research house, if demand were to weaken further in 2019, it expects prices to be under pressure given high overall spot inventories amid weak demand. In other words, the supply shortage will continue to be fed through inventory drawdowns for the time being in a weaker pricing environment.