Materials Stocks at Low Are Seen Too Expensive: Corporate Brazil

Materials Stocks at Low Are Seen Too Expensive
CSN, a Sao Paulo-based steelmaker, tumbled 33 percent this year while Usinas Siderurgicas de Minas Gerais SA, based in Belo Horizonte, sank 19 percent as demand slowed for the material used in cars and home appliances. Photographer: Rich Press/Bloomberg

Brazilian raw-materials producers from Vale SA to Cia. Siderurgica Nacional SA are trading at the lowest valuations since 1998 relative to the nation’s biggest companies. They aren’t cheap enough for BlackRock Inc. or Citigroup Inc.

With domestic and Chinese demand slowing, Brazilian suppliers of iron ore and other basic materials posted a 66 percent decline in second-quarter profit and analysts cut 12-month earnings estimates to a two-year low, according to data compiled by Bloomberg. Morgan Stanley predicted in an Aug. 28 report that iron ore may extend a 32 percent retreat since December amid rising stockpiles in China, the biggest consumer of the steelmaking ingredient.

“Valuations are attractive in the materials sectors but we are not currently buying,” Jason Press, a New York-based emerging market strategist at Citigroup, said in a phone interview. “The earnings outlook is still uncertain.”

The MSCI Brazil Materials Index lost 20 percent this year and was valued at 1.1 times net assets at the end of August, a 25 percent discount relative to the MSCI Brazil Index. That’s the widest gap on a monthly basis since November 1998, data compiled by Bloomberg show.

Estimates Drop

Profit estimates for companies in the materials index have fallen 22 percent since December, compared with a 15 percent drop for the MSCI Brazil gauge, according to forecasts tracked by Bloomberg. The preferred and common shares of Vale, the world’s biggest iron-ore producer, account for 68 percent of the MSCI Brazil Materials index.

The gauge tumbled 2.9 percent to 1,081.11 in Sao Paulo, the lowest close since May 2009. It was the biggest drop among 10 industry groups. Vale’s preferred shares sank 2.9 percent as iron ore dropped to the weakest level since 2009.

The raw-material’s retreat spurred BlackRock, the world’s largest money manager, to reduce holdings of Vale in the past few months, Will Landers, a Latin America fund manager at the New York-based firm, said in a phone interview.

“Vale is suffering with iron ore prices falling in China, and the market asking itself what is really the equilibrium price for this commodity,” said Landers, who favors consumer-related companies and banks in Brazil.

The price of iron ore for immediate delivery to the Chinese port of Tianjin, a benchmark for Asia, declined to $86.90 per ton today, the lowest level since October 2009.

China Growth

The tumble in iron-ore prices below $120 a ton will be “short-lived” and prices will rebound as loss-making producers in China and other countries reduce output, Roberto Castello Branco, the investor relations director at Vale, told reporters at an event in Rio de Janeiro on Aug. 27.

Growth in China, the biggest emerging economy, slowed to 7.6 percent in the second quarter from a year earlier, the weakest pace since 2009. Chinese manufacturing unexpectedly contracted in August for the first time in nine months as new orders shrank and output rose at a slower pace, a Sept. 1 report showed.

Brazil, the second-largest developing economy after China, will grow 1.6 percent this year after a 2.7 percent expansion in 2011, according to a weekly central bank survey of economists published yesterday. The projection is lower than the Washington-based International Monetary Fund’s estimate for growth in the U.S. and Japan this year.

Option Bets

CSN, a Sao Paulo-based steelmaker, tumbled 36 percent this year while Usinas Siderurgicas de Minas Gerais SA, based in Belo Horizonte, sank 20 percent as demand slowed for the material used in cars and home appliances.

Gerdau SA, Latin America’s largest steelmaker, rallied 23 percent as sales to North America jumped amid buoyant demand for long steel, used in construction and infrastructure.

CSN dropped 5 percent today, while Usiminas lost 1.6 percent and Gerdau rose 0.6 percent.

The MSCI Brazil materials index snapped a six-day slide on Aug. 31, rising 3.1 percent as U.S. Federal Reserve Chairman Ben S. Bernanke said the central bank may increase bond purchases to spur growth in the world’s largest economy.

Options traders in the U.S. are reducing bearish bets on Vale’s American depositary receipts. Puts that profit should the shares decline 10 percent cost 12 percent more than calls betting on a 10 percent gain on Aug. 30, the smallest gap since April 2011, according to data on three-month options compiled by Bloomberg. The price relationship known as skew was 13 percent yesterday.

Bullish Analysts

Iron ore prices may rally to $120 a ton next year as Chinese policy makers take steps to revive economic growth, providing a boost to Vale shares, Marco Aurelio Barbosa, an analyst at Sao Paulo-based brokerage Coinvalores, and his assistant Bruno Piagentini said in a phone interview.

“The Chinese economy has space to announce stimulus measures and when they do so, the metal commodities tend to answer positively,” said Barbosa, who has a buy rating on Vale.

Sixteen of 19 analysts tracked by Bloomberg have the equivalent of a buy rating on Vale’s preferred shares.

Vale, which reported a 59 percent drop in second-quarter net income, gets about a third of its revenue from China. Itau BBA SA cut its 2012 forecast for Vale’s earnings before interest, taxes, depreciation and amortization by 13 percent and reduced its 2013 estimate by 12 percent in an Aug. 28 note.

The Rio-based company was valued at 5.1 times estimated 12-month earnings yesterday, down from 7.1 times two years ago, data compiled by Bloomberg show. It traded for 1.1 times net assets, or book value, the lowest level in two years, the data show. The price-to-book multiple for CSN, the steelmaker that had its first loss in a decade in the second quarter, tumbled to 2 from about 6 two years ago.

John-Paul Smith, a London-based emerging markets strategist at Deutsche Bank AG, predicts China’s economic slowdown is likely to deepen. Weaker growth will boost raw-materials inventories and drive metal prices lower, weighing on Brazil’s stock market, Smith wrote in an Aug. 30 report.

“Investors are particularly aware that iron ore has reached $100, which has caused skittishness in the short-term for materials in general and Vale in particular,” Citigroup’s Press said.

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