20140228-高盛-Iron_ore_price_decline_to_continue,_see__80_t_CFR_in_2015__Reiterate_Sell_on_RIO__CL__and_KIO_12页_538kb

Summary of Global: Metals & Mining Report

Core Content

This report provides an analysis of the global iron ore market and its implications for related equities, focusing on the period around late 2013 and early 2014. It highlights the ongoing decline in iron ore prices, the performance of major and junior iron ore producers, and the valuation outlook for key equities.

Main Points

• Iron Ore Price Decline: Iron ore prices have been declining since December 2013, showing the weakest performance in 5 years. The price has not seen a positive impact from restocking before the Chinese New Year, which is unusual.

• Chinese Steel Production: Chinese steel production growth slowed in late 2013, with the first year-over-year monthly decline since August 2012. Steel PMI remained below 50 for 5 consecutive months, indicating weak demand.

• Iron Ore Port Inventories: Chinese iron ore port inventories reached record levels, reflecting higher imports and weak steel production. This suggests a surplus in the market.

• Market Outlook: The report forecasts a structural surplus in the seaborne iron ore market by mid-2014 and expects prices to fall to US$80/t CFR by 2015. This is attributed to continued supply growth from major producers and weak demand from China.

• Equity Performance: Major iron ore producers like Rio Tinto (RIO) and Kumba Iron Ore (KIO) have outperformed the iron ore price in the year-to-date (YTD), driven by strong financial results. However, the report believes this outperformance is not sustainable and warns of a potential share price correction due to continued price declines.

• Junior Producers: Junior iron ore equities such as African Minerals (AMI) and London Mining (LOND) have underperformed and are more vulnerable to further iron ore price drops.

Key Information

12-Month Price Targets and Ratings

Key Trends

• Production Growth: Major producers delivered significant growth in 2013, with Australian majors offsetting Vale's weak performance. The report anticipates further production increases in 2014 and 2015, leading to a surplus of 83 million tonnes in 2014 and 159 million tonnes in 2015.

• Market Imbalance: The iron ore market is expected to move into a surplus due to increased supply and weak demand, especially from China.

• Valuation Disconnect: Despite strong financial results, major producers are not showing the same performance as the iron ore price. This is attributed to market sentiment and valuation multiples.

• Investor Behavior: Generalist investors have shown improved appetite for the mining sector, particularly for larger cap equities, but this is expected to reverse as the price continues to fall.

Conclusion

The report maintains a bearish outlook on the iron ore market and reiterates Sell ratings for RIO and KIO. It highlights the structural surplus in the seaborne market and the continued price decline. Junior producers are seen as more vulnerable, while major producers may see a correction in their share prices due to the continued price drop. The report also provides valuation metrics and price target methodologies, emphasizing the risks associated with the iron ore price and currency fluctuations.