By Chris Shaw

May trade data to come out of China show a significant reduction in net imports of nickel and a return to net exports of molybdenum, which Macquarie notes is suggestive of heavy de-stocking in finished metal markets.

Macquarie estimates traders, speculators and industry players together may have built more than 100,000 tonnes of primary nickel inventories in 2009, while this year's data to May suggest there has been subsequent de-stocking of as much as 25,000 tonnes of this material.

The broker has looked at total finished nickel production and net trade in finished nickel to estimate apparent Chinese nickel demand fell 4.5% in year-on-year terms in the January to May period. Macquarie's calculations suggest real nickel consumption of 240,500 tonnes in the same period, which implies a run-down in unreported stocks of about 24,000 tonnes.

When added to LME stock declines of 34,000 tonnes year-to-date, the numbers actually suggest a substantial market deficit for nickel so far this year. In the view of Macquarie, the weakness in nickel prices in recent months has prompted speculators to off-load material, so the question for nickel going forward is will they return at lower prices or have they left the market for good. The latter is unlikely in the broker's view.

It appears a similar situation in the molybdenum market, as May data showed China returned to being a net exporter for the first time since December of 2008. With market conditions changing, speculators appear to be lowering their exposure to the metal, leading Macquarie to suggest the current price weakness may yet last for several more months.

De-stocking in metal markets is a logical move for speculators concerned about the Chinese growth outlook given the importance of Chinese buying for commodity markets. But in the view of Credit Suisse, the most likely outcome is a deceleration in China's growth rate rather than a contraction in the economy.

Credit Suisse now expects Chinese GDP growth of 9.7% for 2010, down slightly from its previous forecast of 10% growth. In 2011 the broker is forecasting growth of 8.8%, down from 9.2% previously. The first quarter of 2011 is expected to be the low point for Chinese growth this cycle, with the changes to forecasts reflecting an expected decline in fixed asset investment growth to 18.7% this year and 14.5% in 2011.

The most direct impact on commodity markets of changes to Chinese growth expectations is in steel, given its use in the construction sector. As Credit Suisse points out, steel production is a significant variable in iron ore demand and is also important for met coal demand.

While global steel production rates may come down further in the shorter-term, Credit Suisse suggests one positive for the market is Chinese per capita steel consumption is still well below western levels and so should continue to increase over the medium-term.

The other positive in this regard is Chinese money supply growth, as this is expected to be in the order of 15-20% over the next 12 months. Having looked back through previous cycles, Credit Suisse notes there are no periods when China's steel output contracted significantly while money supply was growing at such a rate.

Even if there is a decline in the growth rates for steelmaking raw materials, Credit Suisse notes it will be off a very high base, which means both iron ore and coking coal prices should remain at elevated levels.

Deutsche Bank agrees, continuing to rate coal as a preferred commodity sub-sector given an expectation current infrastructure constraints in both Australia and China remain an issue for coal markets until at least 2013.

While any weakening in global steel demand could result in some weakness in coking coal later this year and into the first half of 2011, Deutsche expects pricing will remain biased to the upside given elements of scarcity in the market and ongoing import demand growth in regions such as India and Brazil.

According to Deutsche, Chinese met coal import demand may mature over the next few years, but this still suggests solid buying as its forecasts call for an increase from 45 million tonnes this year to around 65 million tonnes in 2015. Any slowing of growth in the Chinese market should be offset by growing demand from both India and Brazil as both nations lack domestic supply sources.

Given its positive view on the met coal market, Deutsche rates Macarthur Coal ((MCC)) and Whitehaven Coal ((WHC)) as its preferred exposures, ascribing Buy ratings to both stocks. Centennial Coal ((CEY)) is rated as a Hold as recent share price gains mean much of the upside from a positive coal environment is now priced into the stock.

In terms of overall ratings on the market, Sentiment Indicator readings for the coal plays according to the FNArena database stand at 0.3 for Macarthur, 0.7 for Whitehaven and 0.3 for Centennial Coal.

Mining stocks have come down of late but are not yet at “no brainer” cheap levels according to Credit Suisse, particularly given the market is entering its traditional summer slowdown. But if negative sentiment were to continue the broker sees scope for some good opportunities to emerge among the large cap plays in coming weeks.

In an attempt to identify where the best value will be, Credit Suisse has returned to its deep value metrics, which include price to book value, implied growth and company earnings multiples based on long-term commodity price assumptions.

Using these metrics Credit Suisse sees both Rio Tinto ((RIO)) and BHP Billiton ((BHP)) approaching deep value territory, with Rio the preferred play given its larger iron ore business and so stronger earnings momentum in what should remain a robust iron ore pricing environment.

Credit Suisse rates both stocks as Outperform, with price targets of $100 for Rio Tinto and $45.00 for BHP. The FNArena database shows Sentiment Indicator readings for Rio Tinto of 0.9 and for BHP of 0.7, while respective average price targets are $93.26 and $47.84.

Turning to the energy sector, Deutsche Bank has reviewed its models and the result is no change to its oil price forecasts of US$80 per barrel in 2011 and US$100 per barrel by 2015. The broker has also retained its global growth forecasts, which it estimates will translate into oil demand growth of 1.6 million barrels per day this year and 1.4 million barrels per day in 2011.

What has changed a little is the Australian dollar, its fall against the US dollar generating a benefit for Australian producers as they receive higher Australian dollar revenues for US dollar denominated oil sales.

The review sees Deutsche make some adjustments to earnings estimates, with Santos ((STO)) the major beneficiary among the majors with increases to the broker's earnings per share (EPS) forecasts of 7% this year, 12% in 2011 and 8% in 2012.

Others to enjoy decent sized increases to forecasts are Australian Worldwide Exploration ((AWE)) and Nexus Energy ((NXS)), though in both cases the earnings changes come from significantly lower bases.

Given changes to forecasts, Deutsche has also adjusted price targets across the sector, though changes here have been relatively modest. No changes have been made to individual stock ratings, which means Deutsche continues to rate Woodside ((WPL)), Santos and Oil Search ((OSH)) as its top picks. Australian Worldwide is also rated a Buy given the potential upside from the company's ongoing exploration program.

Caltex ((CTX)), Origin Energy ((ORG)), Arrow Energy ((AOE)), Nexus and AED Oil ((AED)) are all rated Hold by Deutsche Bank.

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