BofA Global Research-Basic Materials - Asia-Pacific (H) How important is China ...

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Refer to important disclosures on page

55 to 58. Analyst Certification on page 48. Price

Objective Basis/Risk on page

40. 12602551

Basic Materials

- Asia-Pacific (H)

How important is China? What if it slows

down?

Bright spot and APAC implications

Industry Overview

Is China replaceable in energy and materials world? No

As the

biggest consumer, China used over 50% of the world’s coal, cement, aluminum

and copper in 2022. In terms of global production, it accounts for 61% of float glass,

54% of steel, 18% of refined oil, 25% of paper, 88% of rare earth

, and 66-90% of EV

battery metals and materials (lithium,

cobalt, cathode, anode, electrolyte, and

separator).

From a global trade perspective, China’

s imports reached USD2.7tn in 2022,

of which 40% included mineral products, chemicals, and base metals. China is the

biggest buyer of iron ore (64% of global trad

e), crude oil (26%), LNG (21%), and coal

(20%). Over the past 10 years, 87%/30%/380% of global oil/gas/coal demand growth

came from China; it also contributed to 78%/81%/95% of steel/aluminum/copper

demand growth. Given its resources, the completeness of its value chain, and operational

efficiencies, we do not think China would be replaceable in the next 10 years.

Bright spot: copper & oil, cautious construction materials

Our property team expects new starts to

fall by 25%/10% in 2023/24E (after 40% drop

n 2022); and completions to drop by 10-20% in 2024E.

Traditional infrastructure growth

has slowed down due to local governments

’ debt issue and declining demand.

We remain

cautious on cement (100% China construction exposed) and steel, and bearish on glass

(60% demand relates to property completion). We have an Underperform rating on Xinyi

Glass, and a Neutral rating on CRC/ Angang

Energy transition: Structural

capex shift is positive for copper and aluminum. Grid and

solar/EV account for 35/15% of China

’s copper demand. We expect 10% CAGR in China

grid investment and 25~30% CAGR in solar/ EV capacity in 2022

-25E. We have a Buy on

Zijin

on copper growth, Rio/BHP on diversified miners; HNDL on aluminum margin

rebound. Oil: We expect 2024F

Brent price at USD90/b given 1) only 6% of China’s crude

demand is from property; travel is recovering. YTD, China

’s apparent oil demand rose 9%;

2) Saudi and Russia coordinated in crude oil supply cut; 3) peak interest rates to mark a

macro shift back.

We have Buy ratings on PTR, SNP, Woodside, ENEOS, S-Oil, PTT.

mplications to APAC region if China sees slowdown

In the past five years, 44% of Australia commodities or 80% of

Australia’

s iron ore went

into China. Weak China property and steel drive our med

term cautious view on iron ore,

but low stock may support in the short

-term. We have an Underperform rating on pure

iron ore

name FMG and a Neutral rating on Vale. With weaker domestic growth, China

has shifted its policy from limiting production in 2021 to promoting exports since 2Q22,

especially steel and refined oil products. This squeezed Indian and Thai refiners

’

margin;

and affected Japan/ Korea

’s steel mills. Besides Japan and Korea used to be net-

chem ical

exporters to China but weak chemical demand (~40% exposed to property) and capacity

ramp up hurt regional chem margin and lead to our cautious view

– We have

Underperform ratings in Korea Lotte Chem and Thailand IRPC

15 September 2023

Equity

Asia

-Pacific

Basic Materials

Matty Zhao

Research Analyst

Merrill Lynch (Hong Kong)

+852 3508 4001

matty.zhao@bofa.com

James Redfern

Research Analyst

Merrill Lynch (Australia)

Matt Chalmers, CFA

Research Analyst

Merrill Lynch (Australia)

Joon

-Ho Lee >>

Research Analyst

Merrill Lynch (Seoul)

Takashi E

nomoto >>

Research Analyst

BofAS Japan

Bharat Subramanian

Research Analyst

BofAS India

Komsun Suksumrun

^^^

Research Analyst

Kiatnakin Phatra Se curities

See Team Page for List of Analysts

Exhibit 1: Stocks mentioned on frontpage

Our ratings

Bbg. ticker

Company

Rating

24E PER

BHP AU

BHP

BUY

9.3x

RIO AU

Rio Tinto

BUY

9.4x

VALE US

Vale

NEUTRAL

5.8x

FMG AU

FMG

U/P

8.5x

2899 HK

Zijin Mining

BUY

12.2x

HNDL IN

Hindalco

BUY

9.8x

857 HK

PetroChina

BUY

6.2x

386 HK

Sinopec

BUY

6.1x

WDS AU

Woodside

BUY

10.7x

5020 JP

ENEOS

BUY

8.0x

010950 KS

S-Oil

BUY

6.5x

PTT TB

PTT

BUY

8.4x

011170 KS

Lotte Chem

U/P

8.2x

IRPC TB

IRPC

U/P

7.8x

868 HK

Xinyi Glass

U/P

9.2x

1313 HK

CR Cement

NEUTRAL

8.2x

347 HK

Angang

NEUTRAL

7.3x

Source:

BofA Global Research estimates

BofA GLOBAL RESEARCH

Accessible version

Timestamp: 14 September 2023 04:30PM EDT

Basic Materials

- Asia-Pacific (H) | 15 September 2023

Key charts

Exhibit 2: China’s roles in resources and basic materials world

China plays a leading role in consumption, trade, processing; China’s growth drove commodities in the past decade

Source:

NBS, China Customs, BNEF, Woodmac, BP Statistics, European Chemical Industry Council (CEFIC), BofA Global Research estimates

nless otherwise stated, all data are based on amount value; Unless otherwise stated, all data are from 2022

LNG, crude oil and coal data are based on 2021; Chemical data is based on 2020

sales money value

BofA GLOBAL RESEARCH

Basic Materials - Asia-Pacific (H) | 15

September 2023

Exhibit 3: China’s impact to APAC Region

China impacts Australia’s resources exports and China’s export policies are important to neighbors

Source:

Wind, Bloomberg, Woodmac, Wor ldsteel Association, BP Statistics, BofA Global Research estimates

Note:

Unless otherwise stated, all data are based on amount value; ”44%...” in term of money v alue

BofA GLOBAL RESEARCH

Exhibit 4: China key basic materials and fossil fuel supply – demand and our view

We are positive on oil, gas, aluminum, and copper, which are less exposed to property

Basic Materials

Primary energy

Aluminum

Copper

Lithium

Steel

Cement

Glass

Paper

Coal

Oil

Gas

Our view

Positive

Neutral

Bearish

Positive

Supply

Resources

Bauxite

Copper

Concentrate

Lithium

Spodumene

Iron Ore

Crude coal

Crude oil

Natural Gas

Domestic output

42%

22%

45%

20%

93%

70%

60%

Imports / (net exports)

58%

78%

55%

80%

30%

40%

Process products

Primary

Aluminum

Copper

Cathode

Lithium

Cathode

Finished

Steel

Domestic output

98%

75%

77%

106%

100%

105%

85%

Imports / (net exports)

25%

23%

-6%

-5%

15%

Demand

Construction

28%

20%

58%

100%

67%

24%

Manufacturing

42%

51%

Auto

25%

55%

21%

Consumer

17%

18%

76%

Machinery

12%

20%

Power Equipment

12%

37%

Transportation

31%

11%

Power & Heating

62%

18%

Residential

11%

Others

10%

34%

15%

12%

14%

Source:

Wind, Bloomberg, Woodmac, BP Statistics, BofA Global Research estimates

BofA GLOBAL RESEARCH

We remain cautious on China coal sector yet in near term China coal prices are

supported by 1) global energy price increase and 2) domestic supply disruption.

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