Daily Brief Energy/Materials: LG Chem Ltd, SICC, Ecopro BM Co Ltd, JSW Steel Ltd, Copper and more

• Despite the WATCH list’s confusion, LG Energy Solution replaced LG Chem. In addition, Solactive excluded Iljin Materials, evidently due to its float-adjusted market cap size.
• There are some somewhat elusive additions. The most prominent example is Japan Steel Works, which replaced LG Chem in the updated WATCH list at the last minute.
• There was confusion about LG Chem’s deletion until the last minute, so, likely, the market has not sufficiently reflected this rebalancing factor in LG Energy/LG Chem’s LONG/SHORT.

• With the review period nearly complete, there could be 4 changes using a 12-month minimum listing history, and 5 changes using a 6-month minimum listing history.
• The market cap of potential adds using a 6-month minimum listing history is higher and there is a higher probability of a 6-month minimum listing history being used.
• The potential adds have outperformed the potential deletes and the index. Similar to the last few rebalances, we could see the adds outperform post the end of the review period.

• The sharp decline in the Korean stock market this year has led to more Korean companies conducting share buybacks. 
• As of 23 October, the number of companies in Korea seeking share buybacks in Korea increased by 41% YoY with 308 companies announcing share buyback programs.
• In the past month, some of the larger market cap companies including Ecopro BM and SKC that have announced share buybacks have significantly outperformed the market.

JSW’s Q2/22-23 results continued to disappoint in our view, with very weak profitability due to a plunge in steel prices. Raw material prices remain high. At this pace, Gross Debt/EBITDA may reach 5x at FYE 2022-23. Liquidity is sound, with a large cash position. We revised our FY 2022-23 margin forecast downwards to reflect the weaker than expected operating environment.

We are concerned about JSW’s large capacity expansion programme and capex plan, which may not be appropriate given the deteriorating market conditions. Peer Tata Steel appears more shielded from adverse raw material costs (thanks to its deeper vertical integration), and is also more conservative in terms of debt management (it has reduced debt by USD 1 bn p.a.) as well as capacity expansion.

We do not expect rating pressure in the near term, but remain cautious in the medium term.

• Inventories of copper in warehouses run by exchanges such as the LME do not provide a complete picture of copper stocks in the supply chain since many industrial users will hold their own reserves of the metal.
• But visible stocks can have a significant influence on sentiment in the market.
• It’s just striking how negative the financial markets are about this industry, yet the physical market is so tight.