September 8, 2010
China: Metals & Mining
Expect further production cuts in 4Q10 to trigger earnings upside
Expect a larger degree of energy control in 4Q
Our industry checks have led us to believe that local governments have
been implementing strict energy controls on industrial production (i.e.,
steel and cement production) in Hebei, Shanxi, Jiangsu and Zhejiang
provinces in order to meet the central government’s year-end energy-
saving target of reducing energy consumption per unit of GDP by 20%
during 2006-10.拉肚子适合吃什么食物
We believe this is only at the beginning stage and expect to e a larger
degree of energy control across the nation in the coming quarter, given
that 1) the National Development and Reform Commission (NDRC) has
announced it would impo further power control measures in the major
18 provinces and 2) our conversation with the Ministry of Industry and
Information Technology (MIIT) and industry participants have led to us to
believe that the government is strongly committed to meeting the target.
Implications
We note that the domestic HRC spot price and Eastern China cement price
ro 4% and 10% during the past month, respectively, and we expect spot
prices for steel and cement products to remain sustainable at above the
current level on further production cuts in 4Q10 given further power
control by local governments.
Currently our channel checks suggest that some steel/cement companies
have cut back production by c. 30%-70% owing to power control, and this
is likely to continue for at least one month and possibly until year-end. Our
nsitivity analysis suggests that:
1) 2010 crude steel production and cement production could be 0%-20%
and 9%-26% lower than our current estimates.
2) 2010 HRC and Eastern China cement prices could be 5%-10% and 4%-5%
higher than our current estimates, bad on hist. profitability performance.
3) We could e 47%-322% upside to our 2010 net earnings estimates for
the steel companies under our coverage, and 27%-41% upside for the
cement companies under our coverage.
Government’s execution and sustainability are key
We believe steel/cement price movements will be largely determined by
the local governments’ power control execution, as well as sustainability of
policy implementation.
Jim Hung
+86(10)6627-3191 jim.hung@ghsl Beijing Gao Hua Securities Company Limited The Goldman Sachs Group, Inc. does and eks to do business with companies covered in its rearch reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, e the end of the text. Other important disclosures follow the Reg AC certification, or go to /rearch/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as rearch analysts with FINRA in the U.S.
Rowena Chang
+86(10)6627-3054 rowena.chang@ghsl Beijing Gao Hua Securities Company Limited
Sensitivity analysis on potential impact from energy control
China’s central government has t a target to reduce the energy consumption per unit of
GDP by 20% during 2006-10. From 2006-09, energy consumption per unit of GDP declined
14.38% across all provinces, yet the number is up 0.09% yoy in 1H10, leading to higher
pressure for the government to meet the 20% reduction target in 2H10.
Exhibit 1:Yoy growth rate for energy consumption per unit of GDP in 1H10
Breakdown by province
Source: National Bureau of Statistics
We conducted a scenario analysis by asssing the degrees of production cuts across the
nation in 2010E.
We conduct two nsitivity analysis below, assuming production cuts happen (1) only in
Hebei, Shanxi, Jiangsu, and Zhejiang and (2) in all 18 provinces highlighted in NDRC’s
异言statement, which include Hebei, Shanxi, Jiangsu, Zhejiang, Inner Mongolia, Liaoning, Jilin,
Heilongjiang, Shandong, Henan, Hunan, Guangdong, Guangxi, Hainan, Sichuan, Guizhou,
Qinghai and Xinjiang.
Exhibit 2: 2010 crude steel production volume under different degrees of production cuts vs. GS 2010 crude steel production estimates
Assuming production cuts happen in 4 provinces
Exhibit 3: 2010 crude steel production volume under different degrees of production cuts vs. GS 2010 crude steel production estimates
Assuming production cuts happen in 18 provinces
Source: Gao Hua Securities Rearch estimates.
Source: Gao Hua Securities Rearch estimates.
Exhibit 4: Scenario analysis of steel price, company margins, and earnings performances
Note: Ba-ca figures are our current estimates. Source: Gao Hua Securities Rearch estimates.
Exhibit 5: 2010 cement production volume under
different degrees of product cuts vs. GS 2010 cement production estimates
Assuming production cuts happen in 4 provinces
Exhibit 6: 2010 cement production volume under
different degrees of production cuts vs. GS 2010 cement production estimates
Assuming production cuts happen in 18 provinces
Source: Gao Hua Securities Rearch estimates.
Source: Gao Hua Securities Rearch estimates.
Exhibit 7: Scenario analysis of cement price, company margins, and earnings performances
Note: Ba-ca figures are our current estimates. Source: Gao Hua Securities Rearch estimates
20%40%60%80%
Sept
0.3%-0.4%-1.1%-1.8%Sept - Oct
-0.4%-1.8%-3.2%-4.6%Sept - Nov -1.1%-3.2%-5.3%-7.3%Sept - Dec
-1.8%
-4.6%-7.3%
-10.1%
Impacted Period
Degree of Production Cut
20%40%60%80%
Sept
神的英语
-0.3%-1.6%-2.9%-4.1%Sept - Oct
-1.6%-4.1%-6.7%-9.3%Sept - Nov -2.9%-6.7%-10.6%-14.5%Sept - Dec
-4.1%
-9.3%-14.5%
-19.6%
Impacted Period
Degree of Production Cut
Rmb/ tonne (incl. VAT)Ba Ca Scenario 1Scenario 2Change (%)Ba Ca Scenario 1Scenario 2
2010E HRC
4,750 5,007 5,207 2010E HRC 0%5%10%Implied Sept - Dec HRC price 4,330 5,100 5,700 Implied Sept - Dec HRC price 0%18%32%2010E GM (%)Ba Ca Scenario 1Scenario 2
Change (ppt)
Ba Ca Scenario 1Scenario 2
BaoSteel 11%13%15%0.0 2.7 4.6Angang 11%17%22%0.0 6.310.6Wugang 8%14%18%0.0 5.69.5Magang
8%15%19%
0.07.011.82010E Net Earnings (Rmb mn)Ba Ca Scenario 1Scenario 2
Change (%)
Ba Ca Scenario 1Scenario 2BaoSteel 9,085 13,318 16,613 0%47%83%Angang 5,034 10,908 15,478 0%117%207%Wugang 1,861 5,232 7,856 0%181%322%Magang 1,770 4,800 7,158
0%171%304%20%40%60%80%
Sept
-8.6%-9.0%-9.3%-9.7%Sept - Oct
祖父母的英语-9.0%-9.7%-10.4%-11.1%Sept - Nov -9.3%-10.4%-11.5%-12.5%Sept - Dec
-9.7%
-11.1%-12.5%
-14.0%
Impacted Period
Degree of Production Cut
20%40%60%80%
Sept
-9.4%-10.5%-11.6%-12.8%Sept - Oct
-10.5%-12.8%-15.0%-17.2%Sept - Nov -11.6%-15.0%-18.4%-21.7%Sept - Dec
-12.8%
-17.2%-21.7%
-26.2%
Impacted Period
Degree of Production Cut
Rmb/ tonne (incl. VAT)
Ba Ca Scenario 1Scenario 2Change (%)
Ba Ca Scenario 1Scenario 2
2010E Eastern China Cement Price
286 296 299 2010E Eastern China Cement Price
0%4%5%Implied Sept - Dec Eastern China Cement price 269 299 309 Implied Sept - Dec Eastern China Cement price 0%11%15%2010E GM (%)Ba Ca Scenario 1Scenario 2
Change (ppt)
Ba Ca Scenario 1Scenario 2Anhui Conch 26%29%30%0.0 3.1 3.9CNBM
19%22%23%0.0 2.7 3.52010E Net Earnings (Rmb mn)Ba Ca Scenario 1Scenario 2Change (%)
Ba Ca Scenario 1Scenario 2Anhui Conch 3,932 4,974 5,286 0%27%34%CNBM
2,542 3,350 3,593
0%32%41%
与梦同行
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We, Jim Hung and Rowena Chang, hereby certify that all of the views expresd in this report accurately reflect our personal views about the subject company or companies and its or their curities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expresd in this report.
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