Coal

[mhlld]

Merrill says go long on metal stocks where China short
Wed Jul 27, 2005 8:11 AM BST

LONDON (Reuters) - Investors in mining stocks should focus on firms that supply raw materials in which China is in short supply and avoid firms in areas where it has surplus domestic capacity, Merrill Lynch Investment Managers said.

"Our investment strategy concentrates on those companies that supply the raw materials in which China is not self sufficient. This includes bulk commodities such as iron ore, coking coal and thermal coal, as well as copper, nickel, zinc and alumina," MLIM gold and mining analyst Catherine May wrote in a research note on Tuesday.

She said MLIM's World Mining Trust fund was at an all-time high on the back of its major holdings including CVRD (10.6 percent), Rio Tinto (8.8 percent), BHP Billiton (7.0 percent), Falconbridge (5.6 percent) Teck Cominco (4.5 percent) and Alumina (4.2 percent).

"These are some of the few companies that are not only benefiting from high metal prices, but also have near-term expansion opportunities that will allow them to take advantage of the high price environment going forward," May said.

She said one of the particular fears in commodities markets is that China is producing too much steel after moving from being a net importer in 2004 to a net exporter in 2005 and with domestic production increasing by 33 percent year-on-year.

"There is great confusion in the market about whether the overcapacity in steel is a good or bad thing for the mining sector," May added.

"To us it seems clear: China is short of the raw materials required to produce this steel and having to import commodities such as iron ore and coking coal to supply the hungry steel furnaces."



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