Jefferies' China Basic Materials Survey: Aluminum and Copper Outperform Lithium and Steel, Real Estate Still Bottoming Out
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Jefferies' China Basic Materials Survey: Aluminum and Copper Outperform Lithium and Steel, Real Estate Still Bottoming Out
Based on its survey of China's basic materials, Jefferies believes that the supply-demand dynamics for aluminum and copper are favorable, lithium has short-term support but divergent medium-to-long term views, steel demand continues to decline, and real estate sales remain in search of a bottom.
- Supply constraints persist for aluminum and copper, outperforming lithium and steel
- High domestic inventory for aluminum but exports could drive destocking
- Copper demand benefits from grid/new energy sectors, slow recovery in supply
- High demand growth expected for lithium in 2026, but visibility lower for 2027
- Steel demand continues to decline, supply discipline is a long-term effort
- Real estate sales continue to bottom out, limited room for policy easing
Report interpretation
Overview
Jefferies completed an on-the-ground survey of China's basic materials industry. The core conclusion is that real estate-related demand remains weak with no signs of improvement, but manufacturing and exports show resilience. In terms of supply-demand dynamics, supply constraints for aluminum and copper remain intact. Lithium restarts and expansions are progressing after risk pricing, and maintaining steel supply discipline is a long-term battle. The institutional preference ranking is aluminum/copper > lithium > steel.
Core views
Aluminum: Domestic market demand is gradually improving. LME aluminum prices have risen by 26% year-to-date, while spot prices in China have only increased by 8%, reflecting the drag caused by relatively high social inventories. High inventories mainly stem from downstream players needing time to absorb this year's price levels, trade invoice checks revealing hidden inventories, and producers slightly increasing production through methods like boosting current. Looking ahead, the market is focusing on whether export growth in aluminum products can significantly reduce inventories. Orders at major processing companies have grown significantly, up 20-30% year-on-year in April, and it is expected that the growth momentum will continue into May-June. Copper: As a favored commodity, the geopolitical risks posed by the Middle East war have not yet affected large miners due to high copper prices allowing them to cover supply costs. Although some small SX-EW copper producers in Congo face challenges, traders report limited impact with no major concerns over the next 3-4 months. Long-term themes remain unchanged, with robust demand prospects driven by grids/renewable energy being a consensus, though these have not yet been reflected in prices. Last year’s price strength was mainly driven by supply disruptions. Supply-side issues seem unimproved, aging mines exacerbating resource scarcity, and production recovery after major disruptions takes time. Lithium: Short-term support still exists, but views differ in the medium-to-long term. Surveyed companies are confident in lithium demand for 2026, expecting at least 60% year-over-year growth, but visibility is low for 2027, especially in the second half. Uncertainties include the frontloading of ESS demand in 2026, and the narrowing of peak-valley electricity price arbitrage following a surge in ESS projects, which may affect revenue-based IRR. Steel: No signs of improvement. The continued slow decline in demand is uncontested, with expectations for 2030 generally ranging from 850-900 million metric tons per annum. Real estate remains weak in 2026, and autos and appliances lack highlights post-subsidies in 2025. Government-led projects may provide support in the first year of the Fifteenth Five-Year Plan, while machinery, shipbuilding, and other manufacturing demands remain resilient but insufficient to offset weakness in other areas. Direct steel exports are down year-over-year, but Chinese steel remains competitive globally.
Analysis framework
The institution uses a supply-demand framework to analyze investment opportunities in various basic materials, focusing on the persistence of supply constraints and structural changes in demand. For aluminum, indicators such as the difference between LME and domestic prices, social inventory levels, and export potential are used to assess supply-demand balance. For copper, attention is paid to the impact of geopolitical risks on supply, demand prospects in the grid and new energy sectors, and the issue of aging mines. For lithium, the analysis focuses on the certainty of short-term demand growth versus the pace of medium-to-long term supply recovery. For steel, the interaction between policy regulation effects and changes in demand structure is observed.
Methodology notes
Judging investment opportunities in various basic materials through analysis of supply constraints and demand changes
The institution compares differences in supply-demand patterns across materials, finding that supply constraints for aluminum and copper still outperform lithium and steel, highlighting the central role of supply-demand analysis in basic material investments.
Key data
- Year-to-date increase in LME aluminum prices26%As of the end of May, far higher than the 8% increase in China spot prices
- Year-to-date increase in China aluminum spot prices8%Lower increase compared to LME, reflecting weak domestic demand
- Monthly export forecast for aluminum products650kt+According to Aladdiny forecasts, close to the historical high of 680kt
- 2026 ESS growth forecast for lithiumAt least 60% YoYSurveyed companies are optimistic about lithium demand growth in 2026
- 2030 steel demand forecast850-900mtpaIndustry consensus on the long-term downward trend in demand
- 2026 real estate sales forecastDown 7% YoYCentral Plains estimates total residential floor space sales will fall to 680 million square meters
Impact & implications
From an investment perspective, Jefferies believes that among China's current basic materials industries, aluminum and copper have relatively more favorable supply-demand dynamics and better investment opportunities. Growth in aluminum product exports could be a key factor driving inventory reduction, while copper benefits from structural demand in grids and new energy. Lithium has short-term support but significant uncertainties in the medium-to-long term. Demand for the steel industry continues to decline, and building supply discipline requires time. The persistent weakness in the real estate market will continue to suppress related material demands.
Risks
- Continued decline in real estate sales may further drag down construction material demand
- Aluminum product exports falling short of expectations, leading to sustained domestic inventory pressure
- Frontloading of lithium demand growth, weakening growth momentum after 2027
- Poor execution of steel supply discipline, prolonging overcapacity issues
What to watch
- Growth situation of aluminum product exports and actual effects on inventory reduction
- Progress of supply disruption recovery and new project commissioning in copper
- Recovery rhythm of the lithium supply chain and price trends
- Implementation effectiveness of steel capacity replacement policies
- Changes in real estate market policies and improvements in sales data