Falling Chinese steel demand is likely to exacerbate overcapacity problems in China, which bodes ill for U.S. steelmakers. While shares of major U.S. steel producers have fallen in the past couple of months, they still trade far higher than they did to begin the year, aided by higher steel prices, the perception of improved supply discipline in China, and protectionist trade cases.
More rate hikes are coming as soon as the end of the year, which bonds poorly for gold
We doubt any of these three factors will prove strong enough to justify current elevated share prices. Instead, we see considerable downside through the end of the year.
Additionally, our near-term demand outlook is weak, amid soft non-residential construction growth and near-peak levels for U.S. light-vehicle sales. Based on our outlook, every U.S. steelmaker we cover is trading above fair value.
The long-term outlook is similar for aluminium, where we expect lower Chinese demand growth and chronic overcapacity to stymie progress toward a sustained aluminium price recovery. Weaker Chinese demand growth will prove insufficient to absorb the industry’s massive overcapacity and excess inventories. This is critical, as China accounts for half of global aluminium demand and has consumed more than 90% of incremental demand over the past decade.
Low-cost supply additions will also ensure that structural overcapacity remains. Our mid-cycle aluminium price forecast points to a roughly 10% decline from current levels. Accordingly, each aluminium company we cover is trading below our estimate of fair value.
By early September, gold had remained stuck in the mid-$1,300 range, as the U.S. Federal Reserve wavered between increasing the fed-funds rates sooner or later. In August, during the central bank’s annual retreat, Federal Reserve members sounded more bullish on the U.S. economy, as rhetoric supportive of rate increases strengthened. Yet immediately after a disappointing August jobs report, uncertainty on when the Fed will again raise rates returned.
While trying to guess the timing of the Fed’s moves remains as cloudy as ever, we continue to believe more rate hikes are coming as soon as the end of the year, which bonds poorly for gold. As interest rates increase the opportunity cost of holding gold will increase, triggering a reversal of recently robust investor flows into the yellow metal.
Compounding matters, a reversal in flows mean yesterday’s demand becomes tomorrow’s oversupply. We regard most of our gold miner coverage as overvalued, although not as much as we do industrial commodity miners.
Agriculture Stocks Outlook
The recent bumper crop of seed and chemical deals is poised to reshuffle the industry. In contrast to emerging consensus, we doubt that the integrated seed-chemical model will strengthen competitive advantages.
We see limited opportunities for cross-selling and research and development synergies that would strengthen moats, given the differences inherent in the seeds and crop chemicals businesses.
Any R&D synergies, in our view, would be many years down the road. Still, we don’t view the deals as value-destructive, as they occur amid a cyclical trough for the industry and at fairly depressed share prices. Further, the deals are likely to derive at least some value from cost synergies.
With Monsanto finally accepting Bayer’s purchase offer, antitrust regulators have a full plate of seed and crop chemical tie-ups to review. With several potential deals being considered together, we think the probability that each of the deals will be approved has decreased compared with a scenario where each of the deals will be approved has decreased compared with a scenario where each deal faces the regulatory bodies on its own.
