中国反馈：更大的冬季削减和更快的次级需求.docxVIP

CORE European Mining China feedback: Wider winter cuts and faster infra demand  INDUSTRY UPDATE European Mining POSITIVE Unchanged  Equity Research 5 October 2018 We visited steel mills in Shanxi province last week – a timely trip given winter cuts getting under way, with some mills affected by cuts for the first time and others not. We came away more optimistic about the outlook for construction demand in Q4 and 2019, driven by recent stimulus and a still-solid property market. The impact of winter capacity curbs is underestimated by the market, in our view: including the Fenwei Plains and Yangtze River Delta regions in 2018/19 increases China’s affected steel capacity from a third to over 50%. Given significantly lower PM2.5 emissions achieved last winter, a further 3% reduction in PM2.5 implies cuts will need to be stricter than last year despite a more flexible approach by the government. This should support steel and high grade iron ore prices into 2019 and backs up our recent HYPERLINK /go/publications/content?contentPubID=FC2412623 double-upgrade to Ferrexpo (OW, 300p). Vale (OW, $15.5) and Anglo American (EW, 1,725p) should also be beneficiaries. Infrastructure stimulus supports construction (70% of steel demand): Recent policy easing should see infrastructure demand improve into Q4 and 2019. This was confirmed by several steel mills now selling directly to government infrastructure projects. Infrastructure contractors that report monthly have seen strong order intake since June, with YTD order books increasing from +6% YoY in June to +16% YoY in August. Meanwhile property demand is robust (starts +15% in August and YTD +11.8%), as is construction-related machinery demand (excavator sales +32% in August, YTD +56%). Construction PMIs rose to 63.4 in September vs. 59 in August. Stricter output curbs to support steel/iron ore prices and quality spreads: Monitoring and inspections have become stricter and more frequent, a recurring theme in our meetings. C