How are you seeing the demand for basic materials in the second quarter of 2011?
We generally think we are running into a soft patch. A combination of events is the Japanese treasury, concerns about oil prices, and the impact of rising oil prices on consumption particularly in Asia. There is a sense that the Chinese tightening programme may be biting more severely in the next quarter. All of which make us a little anxious about demand over the next quarter for commodities.
Japan's reconstruction would be a theme to look out for going forward. How big will that impact be on the construction material, supply and prices? What companies would you look out for then?
We need to clearly have a sense of a timeline here. Over the next 3-6 months, our concern is the demand in Japan, which is going to be somewhat depressed. Certainly at the consumer level, the demand is going to be depressed because of industrial uncertainty associated with power. Also, the demand is going to be depressed because of the impact of clear breaks in the supply chain of key components.
In particular, we look to the orders base where this is a key. The key industry in Japan consumes about 35% of Japanese steel. We expect simply disruptions over the next three to six months leading to declining demand for key materials. Beyond that, one would expect that the size of this reconstruction, 25 trillion yen, is in fact going to stimulate demand for a range of materials. We would argue that given the complexity of the tragedy, relative to where we were in Kobe, this could be delayed at least 12 months before. This kicks-in as a real material driver of additional demand.
Crude futures are heading for their biggest quarterly gains in almost two years given supply disruptions and the Japan crisis, how do you expect prices to impact demand in Asia, especially in emerging economies like China and India?
Clearly there is a sense that these are major consumers of oil. Probably the most leveraged or the most exposed would be India, and we would suggest that something like $10 rise in the oil price takes away about 0.5% of GDP. Therefore, it is 0.5% of corrosion of demand. So, if we see oil prices staying at $120-140 a barrel, it is going to be a significant impact on demand in terms of aggregate demand and India is probably the most exposed but China is not without its concerns.
What are your picks for basic material stocks in Asia?
I actually cannot talk about stocks but I can talk about commodities. At the moment, we would argue over the next 3 to 6 months, truly it is going to be an energy focus with oil prices remaining where they are, a real sense that people are looking to natural gas. LNG as an alternative to a potentially troubled nuclear industry and coal in particular is likely to see some increases in demand as the Japanese power industry gets back. But we expect that is going to be at least three months away before we see the impact on coal. So we like the energy story.
Source : ET