macquarie commodities comment 220515 xe 212821
DESCRIPTION
Commodity, macquarie, coal, oilTRANSCRIPT
Please refer to page 9 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
GLOBAL
LME cash price
% change
US$/tonne day on day
Aluminium 1,735 -0.6
Copper 6,249 0.6
Lead 1,960 2.2
Nickel 12,957 -0.9
Tin 15,773 -1.5
Zinc 2,181 -0.4
Cobalt 30,000 0.6
Molybdenum 17,059 1.6
Other prices
% change
day on day
Gold (US$/oz) 1,205 -0.5
Silver (US$/oz) 17.18 0.6
Platinum (US$/oz) 1,146 -0.6
Palladium (US$/oz) 776 -0.6
Oil WTI 60.29 2.4
USD:EUR exchange rate 1.113 0.4
AUD:USD exchange rate 0.789 0.2
LME/COMEX stocks
Tonnes Change
Aluminium 3,775,300 2,025
LME copper 332,225 -2,650
Comex copper 20,100 -80
Lead 161,500 -1,025
Nickel 446,868 228
Tin 8,225 -130
Zinc 464,950 -2,175
Source: LME, Comex, Nymex, SHFE, Metal
Bulletin, Reuters, LBMA, Macquarie Research,
May 2015
Analyst(s) Macquarie Capital (Europe) Limited Stefan Ljubisavljevic +44 20 3037 4247 [email protected] Colin Hamilton +44 20 3037 4061 [email protected] Matthew Turner +44 20 3037 4340 [email protected] Vivienne Lloyd +44 20 3037 4530 [email protected] Jim Lennon Senior Commodities Consultant +44 20 3037 4271 [email protected] Macquarie Capital Securities Limited Graeme Train +86 21 2412 9035 [email protected] Angela Bi +86 21 2412 9086 [email protected] Chen Shao +86 21 2412 9041 [email protected]
22 May 2015
Commodities Comment A sunny Nice, murky thermal coal market and new look S&D IHS Energy’s Annual European Coal Outlook Conference concluded on
Wednesday, with sentiment subdued but no worse than it was at the Coaltrans’
World Coal Conference last October. We think the main reason is that market
expectations have finally adjusted to the view that USD thermal coal pricing is
unlikely get much better soon. But it may also reflect the fact that alongside end-
users, who clearly benefit from weak coal prices, non-US suppliers have seen
margins supported by FX depreciation, for the moment at least.
In this note we update our views on supply and demand and the price outlook,
given Chinese protectionism and the macro moves of the past 9 months. We
conclude that, barring a large reversal in the oil and FX markets, there is
probably ~$10/t of downside to current spot prices. We also provide some
conference feedback.
Latest news
BHP Billiton (South32) has announced that its June sales prices for
manganese ore will be broadly unchanged from May. Its 46% Mn GEMCO
lump and South African 38% Mn lump are completely flat at $3.20/dmtu and
$3.00/dmtu, while its 48% Mn fines have dropped $0.03/dmtu MoM to
$3/dmtu. A sequential improvement in Chinese steel sector conditions and a
133kt (grossweight) decline in Chinese manganese ore port stocks since the
end of April are likely to be the main reasons for the stabilisation. Otherwise,
we think that broader market conditions remain challenging.
Reuters reported on Thursday that the Chicago Mercantile Exchange (CME),
the provider of the most liquid gold futures contract (the 100 oz contract on
Comex in New York) is developing a similar London-based gold futures
contract which would be deliverable against London-vaulted metal. The
London gold market is considered the world’s largest wholesale market but it
is an OTC one, with gold futures traded for only a brief period in the 1980s.
With trade data from most countries now available, we can now estimate Q1
2015 iron ore trade flows. Seaborne trade rose 3.5% YoY to 1,320mtpa,
though this was down 9.5% QoQ in line with normal seasonality. Within this,
Australian exports rose 13% YoY to 761mtpa, while Brazil grew 11% YoY to
317mtpa. As we have been noting, the smaller players have been those doing
the bulk of the displacement, with Iranian exports down 51% YoY, Mexico 79%,
USA 59%, India 75%, Russia 23% and Vietnam 95%. With Rio’s 360 tonnes
set to bring more displacement, these divergent trends will continue.
IHS Energy has reported that over 40% of coke capacity in China’s Shanxi
province has halted production due to weak prices, with 13.5% ash coke now
selling for RMB720/t, down RMB160/t since the start of the year, accentuated
by a 15-30% decline in the price of by-products. This again points to the
overcapacity for met coal and derivatives in Shanxi at present, with official
data now showing 80% of cookeries are now reporting losses.
ICSG released their latest monthly copper market estimates on Thursday,
with YTD usage estimates to February 2015 down 3.6% while production was
seen up 5.0%, leaving a Jan-Feb surplus of ~153kt.
Macquarie Research Commodities Comment
22 May 2015 2
A sunny Nice, murky thermal coal market and a new-look S&D
IHS Energy’s Annual European Coal Outlook Conference concluded on Wednesday, with
sentiment subdued but no worse than it was at the Coaltrans’ World Coal Conference last
October. We think the main reason is that market expectations have finally adjusted to the view
that USD thermal coal pricing is unlikely get much better soon. But it may also reflect the fact that
alongside end-users, who clearly benefit from weak coal prices, non-US suppliers have seen
margins supported by FX depreciation, for the moment at least.
In this note we update our views on supply and demand and the price outlook, given Chinese
protectionism and the macro moves of the past 9 months. We conclude that, barring a large
reversal in the oil and FX markets, there is probably ~$10/t of downside to current spot prices. We
also provide some conference feedback.
Fig 1 Thermal coal spot prices – we don’t think they have bottomed yet
Source: McCloskey, globalCOAL, Macquarie Research, May 2015
Lower Chinese imports = big market problem
For a large part of 2015, the thermal coal market has been a battle between weak underlying
fundamentals and a trader/producer trying hard to squeeze the Newcastle market. The net result
has been a Newcastle spot price that is down 8% YTD, while the European delivered price is
down a more significant 15% YTD. In other words, fundamentals have generally been winning,
albeit with a few bumps in the road.
Unlike 2010-2013, when annual seaborne supply growth was greater than 50mtpa (or 5-10% p.a.),
thermal coal is no longer seeing large seaborne supply growth. Total 2014 seaborne exports were
down 8mt YoY and 1Q15 exports were down ~4mt YoY. However, these cuts are small in the
scope of the broader market and thus thermal coal remains oversupplied. There are two other key
problems as well.
The first is cost deflation over the past nine months, driven by US dollar strength, the oil collapse
feeding through into lower diesel prices (energy is ~30% FOB coal costs) and lower seaborne
freight (which is effectively a cost to the miner in bulk commodities). Taken together the current
seaborne thermal coal cost curve, on a 6,000-kcal delivered China basis, is down 20% on average
compared to mid-2014. As a result, we estimate that only 15% of the seaborne thermal coal
industry is losing money on a cash basis. While this might sound bad, one should keep in mind
that over the past couple of years we have traded as deep as the 60-70th percentile of the curve
and supply cuts, owing to a number of structural issues, have been few and far between. Thermal
coal is not an efficient market.
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Macquarie Research Commodities Comment
22 May 2015 3
Fig 2 The thermal coal cost curve is, on average, ~20% lower compared to mid-2014
Fig 3 We don’t think much more than 15% of the industry is losing money on a cash basis
Source: Macquarie Research, May 2015 Source: Macquarie Research, May 2015
The second problem is that China is no longer acting as the clearing house for surplus seaborne
tonnes. Previously the seaborne thermal coal market would clear by ‘pricing in’ to China and
displacing Chinese domestic supply. Since 2H14, this mechanism has broken down owing to
Chinese protectionism. A number of policies, ranging from an import tax, to tighter coal quality
standards and port inspections, have made import volumes a function of policy rather than
seaborne coal availability. All of these measures represent China’s rather panicked approach to
support a heavily indebted, largely loss-making and SOE-dominated Chinese coal sector during its
restructuring. This restructuring will be a lengthy process and that risk is skewed towards further
restrictions being put in place.
To illustrate the point, the Chinese domestic thermal coal price is down 24% YTD to just 400RMB/t
for 5,500kcal material (FOB Qinhuangdao) and is 16% lower than last year’s trough when the
protectionism first started. However much Chinese domestic coal costs have fallen over that
period, it is probably not by that much, given the significant share of underground mining in China
(less diesel intensive) and the lack of FX benefit. Hence margins are unlikely to be getting better
for domestic producers. Part of the problem is that the domestic market needs government
intervention to reduce the overproduction we have seen.
Fig 4 China is no longer the clearing-house for surplus seaborne tonnes
Fig 5 Corporate debt is China’s Achilles heel – this is driving restructuring through Chinese state-owned enterprises
Source: China customs, Macquarie Research, May 2015 Source: NBS, Macquarie Research, May 2015
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Macquarie Research Commodities Comment
22 May 2015 4
In 1Q15, raw coal production in China is estimated to be down 3.5% YoY, but we calculate that
Chinese thermal coal consumption was also down 3.5% YoY. A weaker macro environment and
clean-energy displacement of coal is having a major impact, and this ignores the fact that
contestable Chinese thermal coal consumption is falling even faster. The shift of coal-fired power
generation inland and UHV power line development could displace 90mtpa of contestable coal
demand by 2017. Clearly much larger production cuts will be required to shore up the domestic
coal industry.
Fig 6 Clean energy is displacing coal in China
Fig 7 We estimate Chinese thermal coal consumption is down 3.5% YTD
Source: NBS, Macquarie Research, May 2015 Source: NBS, Macquarie Research, May 2015
The result has been that Chinese seaborne thermal coal imports so far this year are running 50%
lower YoY (at the time of writing we don’t have April data, which will likely show a small
improvement) and though some of this Chinese decline will be offset by larger Indian and other
Asian demand, we don’t think all of it will be.
Official trade data for 1Q15 shows global thermal coal exports down 4mt YoY, while thermal coal
imports are reported down 13mt YoY. Disconnects between importer and exporter reporting are a
consistent feature of the coal market, due to timing discrepancies, coal-type misclassification and
illegal exporting. We also don’t include every country in our monthly export tracking, and the
increase in Ukraine’s net imports due to the conflict should be noted, too. Either way, the
implication (whether we take the larger or smaller number) is that volumes are coming out of the
seaborne market.
Where are the cuts coming? So far, as we can see, the largest fall has come from Indonesia.
Some of these may be attributed to heavy rainfall in South Kalimantan at the start of this year, but
as we have outlined a number of times (see our piece last year) we view the small-to-medium size
producer end of the Indonesian coal industry as supplying the marginal tonnes in the seaborne
market. Having hung in there for the past 2 years through aggressive high-grading, we think these
players are now under increasing pressure. One must remember that the majority of Indonesian
mining costs are USD-denominated and hence their competitive position has deteriorated over the
past 9 months. On top of that, when looking at ease of cutting supply cutting globally, Indonesian
producers are, notwithstanding the fact that many are highly indebted, probably top of the list
because they aren’t as burdened by infrastructure and other labour-force related liabilities.
But, the reported export declines are still small in the context of the global market and are smaller
than the reported import declines. As a result, we have adjusted our S/D model to add a line for
unattributed additional supply cuts, based on how much below the usual market-clearing
calculation (global exports minus ex-China imports) Chinese imports are currently running.
Most likely these cuts will have to come from Indonesia too, but until there are firm signs, we leave
it as a separate line item. And if the amount of Chinese protectionism increases, more
displacement will be required beyond the 20mt currently penned in, and this is likely to need an
even lower price. Thus, we think there might be ~$10/t of downside to current spot prices.
Quite simply, seaborne producers need to feel sufficient pain to cut supply.
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Macquarie Research Commodities Comment
22 May 2015 5
Longer-term, even if this supply displacement does proceed in a relatively orderly fashion, price
gains are likely to be reliant on cost inflation reasserting itself, since there isn’t a particularly
compelling ex-China demand story. Much rests on India but there are signs that Indian domestic
supply might be getting its act together. Indeed cost inflation, via a large reversal in the oil and FX
markets, is the largest risk to our short-term bearishness as well.
Fig 8 Indonesian supply cuts are emerging, but more are required
Fig 9 India is not enough to offset the import loss from China
Source: Customs Data, Macquarie Research, May 2015 Source: Customs Data, Macquarie Research, May 2015
Fig 10 Seaborne thermal coal supply and demand
Source: Customs Data, Macquarie Research, May 2015
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Supply (mt) 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F
Australia 171 188 201 203 208 210 212 212 212
Indonesia 380 420 407 392 387 382 377 372 367
South Africa 75 73 75 77 79 81 84 87 89
Colombia 80 74 75 79 84 89 92 95 97
Russia 85 92 106 108 110 110 110 110 110
USA 48 43 29 20 16 16 16 16 16
Other 38 35 25 16 18 19 21 23 24
Total 877 925 917 895 902 907 912 915 915
Unattributed additional supply displacement - - - 20 20 20 20 20 20
New total (inc. China policy impact) 877 925 917 875 882 887 892 895 895
Demand (mt) 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F
EU-28 134 131 124 121 118 115 112 109 106
Other Atlantic 64 55 63 68 70 73 76 80 84
Korea 98 98 100 103 114 124 128 138 140
Japan 134 139 140 140 140 140 140 140 140
India 107 132 151 166 181 191 201 211 215
Other Pacif ic 136 146 148 146 151 157 164 170 173
Total Ex-China 672 700 725 744 774 799 820 848 858
Chinese imports 215 224 201 131 108 87 72 47 37
Notional Balance (10) 1 (9) - - - - - -
Macquarie Research Commodities Comment
22 May 2015 6
Conference feedback: from a demand angle, thermal coal’s eggs lie firmly in the India basket
Below we provide some feedback on other areas of the market, not discussed above.
India: It is crystal clear to all market participants that India is the main demand growth story in
thermal coal (soon to be assisted by Korea, but to a lesser extent). Despite all of the structural
problems in power generation and distribution in India, coal’s share of Indian power
generation is unlikely to decline significantly on a 5-year view (we assume it is flat), while the
domestic coal mining sector is a notorious underperformer. Over the past few months,
including at this conference, we have noticed a dichotomy between India-based analysts and
those outside India, with the former much more optimistic on the ability of India to improve
domestic supply performance, without necessarily getting additional structural reform. Others
remain much more sceptical citing historical underperformance and the need to open up the
commercial mining sector to private companies, something that will be politically messy. The
majority view (reflecting the balance of analysts!) was therefore that one should remain
cautiously optimistic on Indian imports.
We wrote a note in March conducting scenario tests on Indian imports at different rates of
domestic supply growth (Indian coal production guidance – fool me twice, shame on me?),
concluding that at Indian production growth rates of 7.0–7.5% CAGR imports would show no
overall growth from FY15–FY20. For reference, FY10-FY15 production grew at 3% CAGR.
Europe: The European thermal coal market is a market in decline, as policy makes it
increasingly expensive to generate power using coal and near-impossible to develop new
coal-fired power capacity. The exceptions to this are Poland and Turkey. The area of debate
is how quickly European imports fall, with some pointing towards the UK and the fact that
switching to gas appears imminent, as a reason for imports to fall precipitously. They also
highlight that with much of Europe’s gas supply price on a 9-month indexation to oil, there will
be increased flows of cheaper Russian gas from 3Q.
On the other hand, coal burn on the continent remains much more profitable than gas (i.e.
there is a lot of ground to make up) and this should, in spite of policy, keep coal consumption
relatively well supported (this is our current view). The key different between these two
markets is the UK’s carbon price floor which trades well above the price set on the EU market,
and which was hiked once again at the start of April. Reform to the oversupplied EU carbon
market is coming, but not until 2019.
Fig 11 Indian thermal coal imports scenario test, at different rates of domestic coal supply growth
Fig 12 On the continent, coal-burn remains much more profitable than gas
Source: India CEA, Macquarie Research, May 2015 Source: Bloomberg, Macquarie Research, May 2015
Russia: The dramatic increase in Russian cost competitiveness was one of the main points of
discussion, with the average FOB Murmansk coal cost put around $50/t currently. But
underlying Russian inflation was put forward as a reason for why Russian competitiveness
wouldn’t improve further, while other transportation and infrastructure constraints (aside from
the recent Kuzbass landslide), and stronger domestic demand (+13% YTD) should mean that
Russian export growth is small this year.
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Coal generation more profitable than gas
Macquarie Research Commodities Comment
22 May 2015 7
Freight: Of all the commodities and commodities-related markets, freight is surely the worst of
a bad bunch. The eternally-optimistic freight analyst community put forward suggestions that
strong 2H iron ore volumes, increased vessel scrapping and deferral of new orders could
leave room for a rate rebound. Given how low rates currently are, a small rebound might be
possible, but we think this market looks horrible.
Demand growth (i.e. cargo volume growth) will be the lowest this year in a decade, newbuild
ordering remains way too high, a large amount of new capacity is set to enter the market over
the next 2 years, there is already a large amount of latent capacity (i.e. idled ships and ship
slow-steaming), demolition prospects looks relatively poor given how young the fleet is and
more effective utilisation of Vale’s Valemax fleet has significantly reduced contestable freight
demand in the Atlantic basin. Quite simply, there doesn’t appear to be a viable adjustment
mechanism for the market to rebalance any time soon.
Macquarie Research Commodities Comment
22 May 2015 8
Closing price * Closing price *
21-May-15 21-May-15 20-May-15 20-May-15 % ch. day 2015 YTD Ave 2014
US$/tonne US¢/lb US$/tonne US¢/lb on day US$/tonne US$/tonne
LME Cash
Aluminium 1,735 79 1,744 79 -0.6 1,810 1,867
Aluminium Alloy 1,730 78 1,739 79 -0.5 1,799 1,951
NAASAC 1,761 80 1,756 80 0.3 1,883 2,086
Copper 6,249 283 6,214 282 0.6 5,937 6,862
Lead 1,960 89 1,919 87 2.2 1,877 2,096
Nickel 12,957 588 13,069 593 -0.9 13,949 16,867
Tin 15,773 715 16,021 727 -1.5 17,557 21,893
Zinc 2,181 99 2,190 99 -0.4 2,141 2,164
Cobalt 30,000 1,361 29,836 1,353 0.6 29,300 31,251
Molybdenum 17,059 774 16,791 762 1.6 18,246 25,548
LME 3 Month
Aluminium 1,773 80 1,784 81 -0.6 1,820 1,894
Aluminium Alloy 1,745 79 1,755 80 -0.6 1,812 1,974
NAASAC 1,785 81 1,780 81 0.3 1,908 2,117
Copper 6,252 284 6,220 282 0.5 5,917 6,828
Lead 1,972 89 1,930 88 2.2 1,885 2,113
Nickel 13,000 590 13,115 595 -0.9 14,008 16,935
Tin 15,800 717 16,050 728 -1.6 17,585 21,887
Zinc 2,190 99 2,200 100 -0.5 2,148 2,167
Cobalt 30,100 1,365 29,950 1,359 0.5 29,498 31,287
Molybdenum 17,250 782 17,000 771 1.5 18,297 25,548
* LME 2nd ring price - 1300 hrs London time. Year-to-date averages calculated from official fixes.
1,205 1,211 -0.5 1,211 1,266
17.18 17.07 0.6 16.63 19.07
1,146 1,153 -0.6 1,177 1,384
776 781 -0.6 782 803
60.29 58.89 2.4 51.33 93.36
1.113 1.109 0.4 1.116 1.329
0.789 0.788 0.2 0.785 0.903
Change since last report Cancelled End-14 Ch. since
(tonnes) 21-May-15 20-May-15 Volume Percent warrants stocks end-14
LME Aluminium 3,775,300 3,773,275 2,025 0.1% 1,729,075 4,205,225 -429,925
Shanghai Aluminium 289,818 289,818 0 0.0% - 207,428 82,390
Total Aluminium 4,065,118 4,063,093 2,025 0.0% - 4,412,653 -347,535
LME Copper 332,225 334,875 -2,650 -0.8% 120,775 177,025 155,200
Comex Copper 20,100 20,180 -80 -0.4% - 24,150 -4,050
Shanghai Copper 173,157 173,157 0 0.0% - 111,915 61,242
Total Copper 525,482 528,212 -2,730 -0.5% - 313,090 212,392
LME Zinc 464,950 467,125 -2,175 -0.5% 75,350 690,825 -225,875
Shanghai Zinc 191,669 191,669 0 0.0% - 83,471 108,198
Total Zinc 656,619 658,794 -2,175 -0.3% - 774,296 -117,677
LME Lead 161,500 162,525 -1,025 -0.6% 32,525 221,975 -60,475
Shanghai Lead 41,009 41,009 0 0.0% - 63,604 -22,595
Total Lead 202,509 203,534 -1,025 -0.5% - 285,579 -83,070
Aluminium Alloy 20,940 21,140 -200 -0.9% 5,980 26,520 -5,580
NASAAC 63,000 63,320 -320 -0.5% 5,200 80,700 -17,700
Nickel 446,868 446,640 228 0.1% 123,462 414,900 31,968
Tin 8,225 8,355 -130 -1.6% 1,130 12,135 -3,910
Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research
Thursday 21 May 2015
Exchange Stocks
Prices
Gold - London PM Fix (US$/oz)
Silver - LBMA Silver Price (US$/oz)
Platinum - LBMA PM Price (US$/oz)
Palladium - LBMA PM price (US$/oz)
Oil WTI - NYMEX latest (US$/bbl)
EUR : USD exchange rate - latest
AUD : USD exchange rate - latest
Macquarie Research Commodities Comment
22 May 2015 9
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
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Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
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This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 March 2015
AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)
Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)
Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)
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