EUR 900.00 For Business Accounts Only

KGHM - Time for shock and awe

We re-initiate coverage of KGHM with a SELL recommendation and a Fair Value of PLN 51.50, which implies 35.5% downside. For the first time in recent history the majority of global manufacturing PMIs are now in contraction. On top of this, plenty of uncertainty still surrounds the US/China trade discussions. Even if a trade truce is finally declared, we believe it would not alter the bleak outlook for manufacturing as worldwide demand starts to sag. The metal markets are particularly sensitive to the health of China's massive industrial economy, which is struggling according to both the official and Caixin PMIs. Both indices edged up in July but both, critically, remained below the expansion-contraction threshold. The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) for China rose to a five-month high of 50.4 in August from 49.9 in July, after two months of contraction. However, this does not dispel the bleak outlook for the quarters ahead. Forward-looking indicators in both surveys suggest further weakness in the manufacturing sector, reinforcing expectations that Beijing will need to roll out more support measures soon. Other key metals economies such as South Korea, Japan and Taiwan are also suffering. Manufacturing activity in the eurozone has gone from bad to worse, contracting in July at the fastest pace since late 2012. The United States remains a rare bright spot, but even here activity is slowing rapidly. The Institute for Supply Management index fell to 51.2 in July, the weakest growth rate in nearly three years. A breakthrough in US-China trade talks could lift some of the manufacturing gloom but the prospects are vague at the moment.