Positive effect from policy stimulus to remain intact in 1H21 and we expect China construction activities should be resilient, boding well for cement and steel demand. We think the whole cement sector is still in good shape in 1H21 amid solid demand and disciplined production. With our forecast of demand up +1.3% YoY against +1.4% YoY in capacity for 2021, the cement sector is largely balanced. Cement stocks, on average, declined ~20% during the past six months, from de-rating pressure, and we expect stock prices to rebound in 1H21. From 2H21, we could see downside pressure due slowing construction activity, with fading liquidity and tightening control on the China property sector.

Steel prices could rise further, but margins have peaked. We believe China steel mills will continue being negatively impacted by high iron ore price in 2021-22E. We forecast US$125-150/t range in 2021 for iron ore price, and US$110 -130/t in 2022. We reckon average cash margin for China steel mills to fluctuate within the range of Rmb50–650/t (current Rmb604/t). Key change is CRC products (cold-rolled coil) should enjoy higher margin amid strong end-demand from auto production.

Coal price surprises the market on the upside but consensus appears too bearish.

Conventional wisdom tends to underestimate coal demand but overestimate supply. Coal price doubled from Rmb450/t in Apr-2020 to Rmb910/t as of last week. We expect domestic coal supply to hike 80mt (+2.1% YoY) and demand to grow +1.7% YoY to 4.1 bn tonnes in 2021E, but coal import to further shrink 34 mt to 270mt (304mt for 2020). We derived average coal price to edge down 2.6% YoY to Rmb635/t in 21E (Rmb652/t for 2020), boding well for coal companies’ earnings over the coming 6 to 12 months.

Stock Calls: (1) We maintain OUTPERFORM on cement stocks and prefer Conch-A/H.

(2) We like coal names (Shenhua-H) as market consensus is too low. (3) We downgrade Angang and Magang to UNDERPERFORM from Neutral, and maintain OUTPERFORM on Baosteel as the company is the biggest beneficiary of strong auto demand.