- The author expects China's commodity demand growth to slow in 2012, with consumption of key commodities like refined products, chemicals, steel and cement expected to moderate. - A slower Chinese economy will lead to slower oil demand growth of 5-6% compared to 7% in 2011. Steel and cement demand may also decline due to cooling real estate development. - The author forecasts a benign price environment for commodities in 2012, barring any geopolitical risks, as demand growth is balanced by increased production. - The author's top

1. Energy & Materials Strategy
Equity Research Asia Sector Strategy
January 18, 2012
China: Commodity Demand Slows
S&P 2012 GDP ESTIMATES:
China: 7.7%-8.2% Expect China’s commodity demand growth to slow . Although China’s
slow.
Hong Kong: 2.5%-3.0% latest macro data point to resilient domestic consumption, growth is
India: 6.8%-7.3% moderating nonetheless. At this stage, we see the government sustaining
Indonesia: 6.0%-6.5% fiscal spending, but growth is likely to be contained on the back of increased
Japan: 1.5%-2.0% government vehicle net gearing risks and a desire to keep price pressures
Korea: 2.8%-3.3% low. Hence, we expect China’s consumption of key commodities such as
Malaysia: 4.4%-4.9% refined products, chemical feedstock, steel and cement to moderate in 2012.
With the slower near-term growth, we expect a benign international price
Singapore: 2.0%-2.5%
environment for iron ore, coking coal and crude oil, barring geopolitical
Taiwan: 2.3%-2.8%
risks.
Thailand: 3.5%-4.0%
U.S.: 2.0% Cutting Energy to Marketweight (from Overweight). The oil & gas sector
Eurozone: 0.2% has outperformed the Hang Seng Index (HSI) by 7.8% over the last three
months, led particularly by gains at PetroChina and Sinopec. Meanwhile,
2012 INDEX TARGETS: coal sector performance, flat over the last three months, was dragged down
S&P 500: 1,400 by weakness at Yanzhou Coal Mining Co., on slower demand for coking coal
S&P Euro 350: 1,050 in line with moderating demand for steel. With slower oil and coking coal
S&P Asia 50: 3,500 demand growth for 2012, and relatively flat average crude oil prices for 2012
driving down profit gains for the upstream players, we cut our sector
weighting a notch to Marketweight.
Materials recommended weighting remains neutral. As of Jan. 15, the
main China and Hong Kong materials companies listed in Hong Kong have
gained 6.4% year-to-date (market cap weighted), marginally higher than our
Energy Hong Kong/China universe gain of 6.1%. We see pockets of strength in some
segments such as copper and precious metals on supply constraints, but a
Marketweight mixed outlook for other bases metals leaves us neutral as a whole.
Top picks are Sinopec (oil & gas), Yanzhou Coal (coal) and Jiangxi
gas) ,
Materials Copper ( ma terials ). We prefer Sinopec within the Chinese oil & gas space,
(ma terials).
primarily on its cheap valuations and cost-efficient refining operations.
Marketweight Sinopec is more leveraged to reforms in the domestic product pricing
mechanism than PetroChina. We expect the latter’s share price performance
will lag as valuations look unattractive. While CNOOC Ltd’s valuations
remain cheap, we suspect its share price will continue to be weak ahead of
its strategy call today. 2012 production may be flat YoY on recent spills at
the PL19-3 field and the Zhuhai gas terminal.
Ahmad Halim, CFA
Equity Analyst
We believe Yanzhou Coal is poised for a rebound in 2012 as its share price
Hooi Tow, Chew has corrected by around 47% from the peak of HKD32.95 in May 2011 to
Equity Analyst about HKD17.60 as of Jan. 15, 2012, in response to the slowdown in demand
for coking coal that followed lower steel production. An increase in
Peng,
Su Peng , Ng
production following recent expansion and acquisitions and the listing of its
Equity Analyst
Australian subsidiary are positive catalysts.
We prefer to play the potential rebound in the Materials sector through
Jiangxi Copper. Although we also like Maanshan Iron & Steel for its higher
mix of long steel products, the company’s 64% rebound in the past three
months leaves upside more limited.
Standard & Poor’s This report is for information purposes and should not be considered a solicitation to buy or sell any security.
Neither Standard & Poor’s nor any other party guarantees its accuracy or makes warranties regarding results
Equity Research Services
from its usage. Redistribution is prohibited without written permission. Copyright © 2012. All required
30 Cecil Street
d i s c l o s ur e s a nd an a l y st c er t if i c a t io n ap p e ar s o n t he la s t 3 p a g e s of t h i s r epo r t . A dd i t io n a l i nf or m a t io n i s
Prudential Tower, 17th Floor
a v a i l a b le on r eq u e st .
Singapore, 049712

2. January 18, 2012 Energy & Materials Stra tegy
2011 oil demand: a story of two halves. Total oil demand growth for China
remained strong in 1H11, registering above 8% YoY growth for all months 2
but June. 2H11, however, painted a different picture, with growth ranging
from 3%-5% as weakness in the export markets, continuing European
sovereign debt crisis and uncertainties on the global economy drove down
demand growth, particularly for kerosene and light chemical feedstock.
Diesel demand growth for the year, always more in tune with domestic
consumption, ended lower at 8%, vs. 10% in 2010.
A slowing economy to cool o il demand growth in 2012. Given our
expectation for China’s economy to record 7.7%-8.2% GDP growth for 2012,
slower vs. 2011’s 9.2%, we think demand for crude oil in China will only
grow by 5%-6%, vs. the 7% expected in 2011. Drilling down to the oil
products, we expect further weakness on diesel demand growth as it plays
catch-up to the other products, but support for domestic consumption
should be provided by the likelihood of a relatively more relaxed monetary
policy by the PBoC. Gasoline, kerosene and light chemical feedstock should
also see some continuing weakness as the export market continues to
meander, but we do not expect a contraction in demand, barring a global
financial meltdown as experienced in 2009.
Benign price environment, barring excepti onal circumstances. Based on
exceptional
December 2011 EIA data, we expect China will continue to drive incremental
global demand growth for oil in 2012, but its share of incremental demand is
likely to fall to about 41%, vs. 64% in 2011, due to slower absolute volume
growth and higher demand growth from other emerging economies (e.g.
Central & South America and the Middle East countries). We see a relatively
benign price environment for oil in 2012, with demand growth adequately
balanced by increased production, both from OECD (U.S. & Canada) and
non-OECD (OPEC - largely from non-crude liquids - and China). Risks remain,
however, as the demand outlook can be affected by continuing global
economic worries, while geopolitical tensions in key production areas or
transportation channels e.g. Iran’s Strait of Hormuz, can have a substantial
impact on security of supply, and hence prices.
Cooling real estate development may slow steel and cement demand
growth . China’s steel demand relies heavily on real estate development,
which takes up 61%-63% of the country’s steel annually. The drive to cool
the property market has seen transactions drop recently and prices in some
Tier-1 cities (e.g. Shanghai, Beijing, Hangzhou) are down more than 20% YoY
from their recent peaks in some cases. As such, we see real estate
development as a lesser driver of steel demand in 2012. Demand for long
steel products may be less impacted than flat steel, given the government’s
plans to build up to 36 million affordable houses by 2015 that we believe
should help prop up demand. Nonetheless, with our view that property
prices and transactions will ease, we could see steel demand falling by 70
mln tons, which is about 10% of current annual steel production.
R ailway spending cutbacks are another negative. Further, rail construction
is expected to contract by 15% YoY to CNY400 bln in 2012, after an
estimated 33.9% YoY fall to CNY469 bln in 2011, resulting in a fall in demand
equivalent to less than 2% of China’s annual steel production. Although the
impact is minimal, this just adds to the negative sentiment for the steel
industry
Standard & Poor’s Equity Research

3. January 18, 2012 Energy & Materials S tra tegy
Positive points are that inventory and costs pressures are low . End-2011
inventory has fallen 10% from end-2010, indicating potential restocking 3
could happen soon. The decline in long steel products could also be a result
of demand from the social housing program. Lower prices of raw materials
such as iron ore and coking coal should also help cushion profits. Also, with
pricing for some companies now settled on a monthly basis (vs. quarterly),
the beneficial impact of input prices will be felt much quicker than
previously.
Industry consolidation to intensify . The other positive point coming out of
the present slowdown is, we believe, the impetus for industry consolidation.
We see smaller mills closing, as competition intensifies, amid weaker global
demand. This should help consolidate the fragmented industry in favor of
the larger players and help contain the risk of periodic excess capacity.
Fixed Asset Investment growth (on left below) eased in China to the lowest level since data first commenced in 2004 as
outlook
government spending fell from 2009 and 2010 highs. The outlook for 2012 points to moderate growth with real estate
investment, a key driver of 2010 and 2011 growth (see breakdown on right below), slow ing .
b reakdown below), slowing
ing.
36 100%
90% 14% 14% 15% 15% 15%
34
80% 8% 8% 9% 9% 8%
32
70%
24% 24% 22% 24% 25%
30 60%
YoY%
50% 11% 10% 12%
28 12% 9%
40% 8% 7% 7% 6% 5%
26 30%
24 20% 30% 31% 30% 31% 34%
10%
22 4% 5% 4% 4% 4%
0%
20 2007 2008 2009 2010 YT Nov.
'11
p
ar
r
ay
l
v
n
b
n
g
t
c
Ju
Oc
Ap
No
Ja
Fe
Ju
Au
Se
De
M
M
Mining Manufacturing
Utilities Transport & Storage
2007 2008 2009 Real Estate Water & Environment
2010 2011 Others
Source: CEIC
Standard & Poor’s Equity Research

4. January 18, 2012 Energy & Materials Stra tegy
4
Top Commodity Sector Picks: Performance and Key Capital IQ Consensus Ratios as at Jan . 18, 2012
Jan. 18
Price Performance PER (x) PAT Growth
Market
Ma rket
Trading Cap (USD
Company Name CIQ Ticker Ccy Share Price mln) 1 Mth 3 Mths 6 Mths FY2011 FY2012 FY2011 FY2012
O&G
China Petroleum & Chemical Corp. SEHK:386 HKD 9.15 103,634 14.4% 28.2% 20.6% 8.5x 7.8x 11.2% 8.6%
CNOOC Ltd. SEHK:883 HKD 15.78 90,724 14.3% 21.0% -11.8% 8.3x 8.4x 33.1% -1.5%
Materials
Anhui Conch Cement Co. Ltd. SEHK:914 HKD 25.40 14,896 8.8% 5.0% -35.9% 8.8x 8.6x 108.9% 5.3%
Zijin Mining Group Co. Ltd. SEHK:2899 HKD 3.38 13,343 11.9% 10.8% -23.9% 9.5x 8.5x 33.7% 15.8%
Jiangxi Copper Co. Ltd. SEHK:358 HKD 19.16 11,649 11.8% 23.6% -29.4% 7.2x 7.4x 61.7% -5.4%
Maanshan Iron & Steel Co. Ltd. SEHK:323 HKD 2.99 3,113 17.3% 57.4% -10.2% 49.0x 19.0x -75.7% 336.0%
EV/EBITDA PBV ROE Gross Margin Div Yield
Company Name FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012
O&G
China Petroleum & Chemical Corp. SEHK:386 5.1x 4.7x 1.4x 1.2x 16.8% 16.1% 16.75% 17.14% 3.13% 3.43%
CNOOC Ltd. SEHK:883 4.4x 4.3x 2.2x 1.9x 28.8% 23.5% 59.33% 53.10% 4.13% 4.04%
Materials
Anhui Conch Cement Co. Ltd. SEHK:914 5.6x 5.5x 2.4x 2.0x 30.2% 23.7% 41.40% 39.27% 2.25% 2.16%
Zijin Mining Group Co. Ltd. SEHK:2899 8.4x 6.9x 2.3x 1.9x 25.0% 24.1% 37.95% 38.00% 3.52% 4.07%
Jiangxi Copper Co. Ltd. SEHK:358 6.9x 7.0x 1.4x 1.2x 20.0% 16.6% 11.26% 11.31% 2.14% 2.19%
Maanshan Iron & Steel Co. Ltd. SEHK:323 7.6x 6.2x 0.7x 0.7x 1.4% 4.0% 5.22% 6.27% 2.63% 14.32%
Source: S&P Capital IQ
Standard & Poor’s Equity Research

5. January 18, 2012 Energy & Materials Stra tegy
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6. January 18, 2012 Energy & Materials Stra tegy
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Standard & Poor’s Equity Research

8. January 18, 2012 Energy & Materials Stra tegy
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Standard & Poor’s Equity Research