Asia-Pacific copper sector- Equities already reflecting risks ::Macquarie Research,

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Asia-Pacific copper sector
Equities already reflecting risks
Event
 Near-term copper price upside limited. Our commodities team came back
with a rather cautious view for the next 2-3 months after channel checks in
China. Chinese buyers seem not yet ready to restock, but a lack of inventory
should keep them in the market, resulting in range-bound copper prices.
 Long-term we remain positive. We maintain our mid- to long-term positive
view on copper on the continuing disappointment in supply growth as well as
our view that Chinese tightening is likely to ease toward the year end.
 Opportunities in copper equities. We believe that a cautious near-term
copper price outlook is reflected in Asia-Pacific copper equities as they
corrected 14-21% from the recent highs in July vs an 8% correction in copper
price in LME and 7% in SHFE.
Impact
 Chinese copper demand slowed down in August. Since early August, our
channel checks suggest increasing concern from Chinese traders and
consumers about the macro picture. Utilisation rates at fabricators are falling
and their appetite for holding inventory has not recovered, given tight credit
and high prices.
 Low inventory supporting prices, though difficult to expect upside.
However, the lack of inventory following the 1H destocking means the
Chinese have to come back to market to buy material (meaning apparent
consumption would rise) for ticking over, even if real consumption softens
sequentially. In our view, this will provide support to the copper price.
 Copper companies’ earnings downside potential is 1-22% for 2011E. The
current copper price is US$9056/t. Copper price YTD average is US$9378/t,
and our current official forecast for the copper price is US$11000/t for 2H. If
we assume US$8500/t for the remainder of the year, we see 1-22% downside
to our earnings estimates for Asian copper companies.
Outlook
 Copper equities typically trade at a high correlation with the copper price.
Given our neutral view on the copper price for the next 2-3 months, it might be
difficult to expect copper equities to have a strong momentum near-term.
 However, for long-term investors, we would recommend using the next 2-3
months to bottom-fish quality stocks. We believe copper equities are already
discounting a cautious copper price outlook near-term given the sharper
correction in recent weeks vs the copper price, and hence believe that
downside risk to copper equities should be limited.
 We expect copper prices to regain momentum toward the year-end, when our
China economist, Paul Cavey, expects the Chinese government to allow
some de facto easing with lower inflationary pressure and slowing exports,
which could bring Chinese copper buyers back to the market. PanAust, Oz
Minerals and Jiangxi are more leveraged copper plays in the region, while
Mitsubishi Corp is the least leveraged copper play.