China Basic Materials: Supply constraints drive price resilience; gold, copper, and aluminum outperform lithium, coal, and steel

Overview

This report is JPMorgan's chartbook on China's basic materials sector, covering gold, copper, aluminum, lithium, coal, and steel, and combining macro, supply-demand, inventory, price, cost curve, and company-level valuation catalysts to form its views. The core judgment is that 'supply is in the driver's seat': in an environment where demand is not broadly strong, supply disruptions, cost advantages, inventory changes, and policy constraints become the main drivers of price and earnings divergence across basic materials. The report is more constructive on leading names in gold, copper, and aluminum, remains cautious and neutral on lithium, and emphasizes defense and cyclicality constraints for coal and steel.

Core views

On gold, the report believes the recent pullback offers a tactical entry opportunity. Gold prices are supported by inflation, lower real rates, crisis hedging, central bank buying, and de-dollarization trends; Zijin-related companies have production expansion and earnings leverage. On copper, supply risks continue to support prices, and while the smelting side is pressured by TC/RC, rising sulfuric acid prices can offset part of the headwind. On aluminum, inventories and supply disruptions are keeping profits elevated, and low-cost power plus integration capability are key. On lithium, recovery in EV demand and growth in ESS are positives, but high prices could trigger supply responses, inventory volatility, and valuation crowding, which limit upside. On coal, the focus is on inventories and policy, with Shenhua looking more like a dividend and long-term contract defensive name. On steel, weak demand and slow industry reset limit the short-term earnings rebound, with exports acting as a balancing factor; Baosteel has strong long-term competitiveness but limited near-term earnings growth.

Analysis framework

The report uses a top-down and bottom-up framework: first it assesses the macro backdrop and commodity price cycle, then it examines supply-demand balance, inventories, cost curves, and price elasticity for each commodity, and finally it maps these to listed-company catalysts such as production growth, margins, dividends, M&A, spin-offs, and overseas expansion. Its emphasis is not on a single demand recovery, but on identifying how supply constraints, cost advantages, and by-product income contribute to profits.

Methodology notes

• Commodity supply-demand analysisSupply-led cycle framework

  When demand elasticity is limited, prices and profits are determined more by supply disruptions, inventory destocking, cost curves, and policy constraints.

  The report title and multiple industry sections emphasize supply, inventories, costs, and policy, such as copper supply risks, aluminum supply disruptions, potential lithium supply pressure, coal policy factors, and steel capacity adjustments.

• Company mapping analysisCommodity price elasticity and earnings leverage

  Map commodity price resilience to company production growth, cost advantages, margins, dividends, and valuation unlocks.

  Zijin's gold output and earnings CAGR, Hongqiao's low-cost aluminum profits, Chalco's improving shareholder returns, and Shenhua's long-term contracts and dividends all fit this framework.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Gold / Zijin Mining A/H / Zijin Gold International-H

  Price resilience and production expansion directly drive earnings growth.

  Strengths

  Central bank gold buying, rate-cut expectations, de-dollarization, and M&A-led expansion all provide support; Zijin has high output growth and earnings leverage.

  Weaknesses

  Short-term gold price pullbacks and M&A integration progress may affect timing.

  Comparison

  Compared with other gold companies, Zijin Mining and Zijin Gold have higher CAGRs, and the report treats them as key names combining value and growth.

  Risks

  An unexpectedly sharp fall in gold prices, higher real rates, or weaker-than-expected integration of Allied Gold or Chifeng.

• Copper / Jiangxi Copper A/H

  Supply risks support copper prices, and rising by-product sulfuric acid prices improve smelting margins.

  Strengths

  Sulfuric acid prices have doubled to around Rmb2,000/t, helping offset weak TC/RC; the potential spin-off of JCC Copper Foil could unlock downstream value.

  Weaknesses

  The smelting TC/RC environment remains weak, and copper demand is still influenced by the macro backdrop.

  Comparison

  Compared with pure mining names, Jiangxi Copper's appeal comes more from smelting by-product income and spin-off financing channels.

  Risks

  A decline in sulfuric acid prices, further deterioration in TC/RC, or copper demand below expectations.

• Aluminum / Chalco A/H / China Hongqiao-H

  Supply disruptions, high inventories, and cost advantages are driving margin expansion.

  Strengths

  Chalco is supported by resilient aluminum prices and overseas expansion; Hongqiao is attractive thanks to low-cost power, integrated operations, and a dividend yield above 6%.

  Weaknesses

  Under domestic capacity constraints, growth requires overseas assets or upstream resource security.

  Comparison

  Chalco is more about return improvement and international asset expansion, while Hongqiao is more about cost advantage and cash dividends.

  Risks

  Lower aluminum prices, higher costs, execution uncertainty in overseas projects, or inventory buildup pressuring prices.

• Lithium / Ganfeng Lithium A/H / Tianqi Lithium-H

  EV and ESS demand recovery supports lithium prices, but supply responses limit upside.

  Strengths

  Ganfeng is supported by ESS demand and battery business growth; Tianqi has upstream lithium price leverage through its Greenbushes stake.

  Weaknesses

  Much of the market's optimism is already reflected in valuations; upstream guidance and new supply remain uncertain.

  Comparison

  Ganfeng is more driven by ESS and downstream battery business, while Tianqi is more dependent on upstream resource price elasticity.

  Risks

  New supply releases, rising inventories, a cut to Greenbushes production guidance, or a pullback in lithium prices.

• Coal / Shenhua A/H

  In a range-bound coal price environment, long-term contracts and dividends provide defensive characteristics.

  Strengths

  80% of sales are locked in under long-term contracts, dividend yield is above 5%, and coal chemicals' 1Q26 gross profit rose 40% YoY.

  Weaknesses

  The coal price outlook is limited, and further upside depends on the integration and synergies of newly acquired assets.

  Comparison

  Compared with high-beta cyclical names, Shenhua is closer to a stable-income and dividend stock.

  Risks

  Lower coal prices, policy changes, or weaker-than-expected asset injection integration.

• Steel / Baosteel-A

  Weak demand and a slow industry reset limit short-term earnings elasticity, but scale advantages support the long-term position.

  Strengths

  About 55mn tons of crude steel capacity brings scale, market influence, and long-term competitive advantages.

  Weaknesses

  The report expects 2026E earnings to be roughly flat YoY, with margin recovery held back by slow capacity cuts.

  Comparison

  Baosteel is resilient relative to the industry, but the sector as a whole does not have the upside elasticity of gold, copper, and aluminum.

  Risks

  Weak property and manufacturing demand, export constraints, or slower-than-expected industry capacity reduction.

Key data

• Zijin Gold production growthGold output CAGR of about 15% from 2023 to 2025, accelerating to about 25% by 2028 after the Allied Gold acquisition; organic growth excluding the deal is about 16% CAGR.Used to support Zijin Gold's positioning as a high-growth compounder.
• Zijin earnings leverageUnder price resilience and production growth, base-case earnings CAGR is about 64% for 2025-2028.Shows the earnings amplification from gold price resilience and output expansion.
• Zijin Chifeng acquisitionProposed acquisition of controlling interest in Chifeng Jilong, targeted to close in September 2026, adding 14.5t of gold output.Helps domestic consolidation and production growth.
• Jiangxi Copper sulfuric acid priceSpot sulfuric acid prices have doubled to around Rmb2,000/t.Improves copper smelting economics and offsets a weaker TC/RC environment.
• Chalco dividend returnDividend payout ratio rose from 9% in 2021 to 37% in 2025, and the report expects it to remain around that level through 2028.Reflects improving shareholder returns.
• China Hongqiao cost advantageLow-cost power and integrated operations keep production costs below RMB 13k/t, while an ASP of RMB 24-25k/t supports strong margins.Cost-curve advantage is the core moat in the aluminum segment.
• China Hongqiao dividend yieldDividend yield above 6%.Provides cash-return appeal beyond growth.
• Ganfeng Lithium battery businessDriven by ESS demand, battery business revenue is expected to grow about 25% YoY in 2026E.ESS is a highlight on the lithium demand side.
• Mt Marion guidanceFY26 production guidance was raised to 210-230kt from 190-210kt.Provides near-term supply visibility and also signals supply-response risk.
• Shenhua long-contract share80% of sales are locked in under long-term contracts, with a dividend yield above 5%.Supports earnings visibility and defensive characteristics.
• Baosteel scaleAbout 55mn tons of crude steel capacity.Scale advantage supports long-term competitive positioning.
• Baosteel earnings outlookThe report expects 2026E earnings to be roughly flat YoY.Slow progress in industry capacity reduction limits margin recovery.

Impact & implications

For portfolios, the report suggests prioritizing basic materials names with constrained supply, leading cost curves, stable cash returns, and company-specific catalysts, rather than simply betting on a demand recovery. Gold, copper, and aluminum fit this framework better; lithium has improving EV and ESS demand, but supply response after price gains and valuation crowding reduce the risk-reward; coal and steel are better suited as defensive or long-term structural watch names rather than high-beta cyclical upside positions.

Risks

• A slowdown in global growth causing metal demand to be weaker than expected.
• Higher real rates or a stronger U.S. dollar suppressing gold prices.
• New supply releases in copper, aluminum, and lithium faster than expected, weakening the supply-constraint thesis.
• Inventory destocking falling short of expectations, putting pressure on prices and margins.
• M&A, overseas expansion, asset injection, or spin-off listings underperforming expectations.
• Policy changes affecting coal, steel, and basic materials capacity adjustments.
• The original report has some OCR quality issues, and individual figures and company details need to be checked against the original PDF charts.

What to watch

• Gold prices, U.S. 10-year real yields, central bank gold buying, and the dollar trend.
• Copper inventories, mine-side disruptions, TC/RC, and sulfuric acid prices.
• China aluminum inventories, alumina and power costs, and overseas aluminum asset expansion.
• The strength of EV and ESS demand recovery, lithium salt inventories, and new mine supply.
• Changes in production guidance for key lithium mines such as Mt Marion and Greenbushes.
• Coal inventories, long-term contract execution, policy developments, and the effectiveness of asset injection integration.
• Steel exports, domestic demand, industry capacity reduction, and the pace of margin recovery.