Equity Strategy - Looking into potential late-cycle plays in commodity sectors

Stock Code	Last Price	Change	Change %
DSSA	78,600	13,100	20.00%
MLPT	41,700	1,700	4.25%
SMMA	16,350	1,450	9.73%
TKIM	7,000	725	11.55%
BREN	7,900	650	8.97%
INKP	8,025	625	8.45%
MKPI	25,925	425	1.67%
RATU	7,250	350	5.07%

Equity Strategy

Looking into potential late-cycle plays in commodity sectors

As metal prices are likely entering a ‘late-cycle’ phase, we see copper’s outlook as particularly attractive as it is backed by falling inventory.
While Brent’s price surge is backed by a firmer demand outlook, thermal coal S-D seasonality suggests investors should only add in 2Q24.
Amid light funds’ positioning, better clarity on metals’ production growth may improve sentiment. For now, we like MEDC, ANTM, ITMG.

Metals and oil price surge resembles late-cycle movement in commodities

We see the recent surge in commodity prices (metals: copper +6.0% YTD, nickel +8.9% YTD; oil: Brent +10.8% YTD) as resembling price movements in the late economic cycle. In prior periods, the late cycle price surge for copper lasted for 4-8 months, implying that the current cycle (which started in Oct23) may last for another 1-4 months. In the case of copper, the price recovery in FY24-YTD has been supported by a tighter market balance on the back of a demand surge that outpaced supply, as reflected in the declining inventory at the LME. This, however, is not the case for nickel, which continued to see rising inventory at the LME, confirming the oversupply condition in the market.

Prices remain driven by speculation, implying upside risk (mainly for copper) Looking deeper into metals trade, we note that the price rebound in LME copper prices has mainly been driven by trades from the “investment funds” (i.e., hedge funds/traders), while the producers/commercial buyers have remained bearish (even bigger short positions than the highs in Sep20) – please see exh.6 – with a similar pattern in nickel. Thus, we see the surge in metal prices as driven more by speculative trades and yet to reflect confidence amid the improving market balance (in the case of copper). This implies possible upside risk for copper if the producers/ commercial buyers turn more positive on the price outlook.

Thermal coal remains a laggard as S-D seasonality prevails

Thermal coal has remained a laggard within the commodities’ space, with only a limited rebound in Newcastle prices and still flattish ICI prices YTD. This is not surprising to us as we are approaching the seasonally soft season post-winter demand and as inventory levels in China and India have remained at relatively elevated levels (exh.9 & 10).

Light positioning in metals and coal; should investors play the late cycle?

As of Feb24, domestic funds were largely UW in the metals sector (-220bps UW in metals), neutral in coal, but OW in O&G (+150bps).

Metals: despite the attractive top-down view, sector sentiment is clouded by delays in the govt’s approval of a production plan (RKAB). Our metals sector analyst Hasan Barakwan favors ANTM (Buy, TP Rp2,100) given the potentially strong growth in FY24 nickel ore production and possible reversal in provisions.
O&G: Our O&G analyst Hasan continues to like MEDC (Buy, TP Rp1,950) on a higher production growth outlook.
Coal: thermal coal price seasonality suggests that investors should only aggressively add in 2Q24. For now, we favor stocks with high dividends and reliable production growth (ITMG, Buy TP Rp28,800, final dividend yield of 13.1%).

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