China materials Report Interpretation

Overview

This China materials trip note summarizes meetings with steel, copper, lithium and battery-industry participants. Morgan Stanley finds the most constructive supply-demand signals in copper, lithium batteries/ESS and high-end glass fabric, while the steel outlook remains divided between weak traditional demand and stronger advanced-manufacturing end markets.

Core views

Copper conditions appear tighter than macro sentiment suggests. Tighter reverse-invoicing rules have reduced the ability of scrap without invoices to enter the supply chain, with scrap copper rod production potentially down about 700kt year on year; SMM indicated that roughly 300–400kt of scrap supply has been affected by invoicing constraints. This supports refined-copper consumption and domestic destocking. A limited policy relaxation is being tested in Jiangxi, which represents about 50% of scrap-copper consumption capacity; a wider rollout to provinces such as Hubei and Anhui could increase scrap supply and reduce refined-copper consumption next year. Copper demand is expected to rise by more than 1% in 2026 and more than 2% in 2027, supported by exports, power, transport and renewable energy, while property and white-goods demand remains negative or flat. AI-related copper demand is estimated at about 750kt globally in 2026 and 1.25–1.3mnt by 2030. Against constrained concentrate growth, spot TCRC of US$-200/t implies difficult 2027 annual treatment-charge negotiations; spot-concentrate smelters are already estimated to be losing Rmb3,500–5,000/t, though production cuts are considered unlikely after strong first-half profits. The report’s strongest demand signal comes from the lithium battery and ESS chain. Industry feedback pointed to low inventories and tight copper foil and battery-cell capacity, with shortages potentially lasting into 2027 if new capacity approvals remain restricted. One consultant estimates 2026 battery demand at 3.2–3.3TWh and expects growth above 30% in 2027, primarily from ESS. ESS battery shipments are expected to grow 80–90% in 2026 and about 50% in 2027, while major battery producers reportedly signal at least 50% year-on-year demand growth to suppliers for next year, with some indicating more than 100%. Near-term battery production is expected to rise 5–6% month on month in September and 3–5% monthly thereafter in 2026. Supply is expected to grow by at most about 25%, or roughly 500kt, contingent on restarting Jianxiawo and other Jiangxi lepidolite mines and normal Zimbabwe exports; uncertain approvals and mine restarts create potential upside risk to lithium prices if demand and supply assumptions hold. Company discussions illustrate both expansion potential and execution risks. Ganfeng targets more than 300kt of attributable self-owned-mine lithium output by 2030, versus about 130kt this year, with Goulamina, PPG and CO expansions expected from mid-2028, end-2028 and 2029, respectively. Its battery output is expected to exceed 40GWh this year and reach 55–60GWh next year. CMOC expects copper-cost increases of Rmb1,400–2,000/t quarter on quarter in 3Q after Rmb2,000–3,000/t in 2Q, while higher sulfur, sulfuric-acid and diesel prices may add Rmb2bn to full-year costs. Its completed T&K expansion could lift annual copper output to 1.1mnt in 2029–30, or potentially 1.2mnt with overproduction. DRC power infrastructure includes a 600MW solar project targeted for operation by year-end and a 200MW hydropower project under construction, but a potential transfer of DRC subsidiaries remains uncertain and full-year windfall tax could reach Rmb1bn. High-end glass fabric is also reported to be in sustained shortage. Grace Fabric sees tight supply for L-DK2/T-glass and ultra-thin products, with customers prioritizing volume over price. Low-DK2 pricing continues to rise, low-DK1 prices are also expected to increase, and long equipment lead times, qualification cycles and delayed Japanese expansion could extend tightness through 2027. Steel presents the more uneven part of the trip’s findings. Traditional property-linked steel and appliance demand remain soft, and Baosteel views 3Q as potentially its most challenging quarter year to date because customers have limited acceptance of price increases and cost inflation cannot be fully passed through. Cold-rolled exposure may intensify pressure relative to hot-rolled products. Seasonal improvement in September–October auto production could support cold-rolled pricing, while shipbuilding, construction machinery, grid-related grain-oriented electrical steel and other high-end manufacturing applications remain comparatively strong. Baosteel expects exports above 7mnt this year, versus 4.14mnt in 1H and 6.5mnt last year, but rising trade barriers and tariffs have narrowed export margins, in some cases below domestic levels. Production constraints for steel producers, especially SOEs, persist; the Saudi project remains stalled due to Strait of Hormuz logistics and could require renegotiated terms if resumed.

Analysis framework

Morgan Stanley synthesizes management and investor-relations meetings with Baosteel, CMOC and Ganfeng, plus discussions with copper and battery-chain experts. It evaluates supply-demand balances, production capacity, costs, policy effects, downstream demand and project execution to identify tighter and weaker areas across China materials.

Methodology notes

• Industry AnalysisSupply-demand framework

  Commodity and battery-chain supply-demand balance analysis

  The report compares expected demand growth, available capacity, mine restarts, inventories and supply constraints to assess potential tightness in copper, lithium, batteries and glass fabric.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Materials-chain transmission from inputs and end markets to producers

  The analysis links scrap availability, concentrate charges and raw-material costs with refined-copper demand, smelter economics, battery production and downstream sectors such as grid infrastructure, renewables and AI.

• Industry AnalysisVolume-price decomposition

  Volume, production and price/margin assessment

  The report separates demand and production volumes from pricing and margin effects, including steel export volumes, lithium supply additions, copper treatment charges and raw-material cost inflation.

Asset mapping & comparison

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

• Baosteel

  Covered steel producer exposed to mixed China industrial demand and export conditions.

  Strengths

  Shipbuilding, construction machinery, grid-related electrical steel and seasonal auto demand support selected downstream segments.

  Weaknesses

  High cold-rolled exposure amid weak property-linked demand and limited ability to pass through costs.

  Comparison

  Cold-rolled products have been weaker than hot-rolled products year to date.

  Risks

  Third-quarter margin pressure, trade barriers, narrower export margins and continuing output constraints.

• CMOC

  Covered copper and cobalt producer benefiting from capacity expansion but facing input-cost and DRC execution issues.

  Strengths

  T&K expansion could raise annual copper production to 1.1mnt in 2029–30; power projects support DRC expansion.

  Weaknesses

  Higher sulfur, sulfuric-acid and diesel prices increase costs.

  Comparison

  Cobalt sales recognized in 3Q could double versus 2Q.

  Risks

  Potential DRC subsidiary equity transfer remains uncertain and full-year windfall tax may reach Rmb1bn.

• Ganfeng Lithium

  Covered lithium producer with expanding self-owned-mine and battery capacity.

  Strengths

  Targets over 300kt of attributable self-owned-mine lithium output by 2030 and 55–60GWh of battery output next year.

  Weaknesses

  Expansion timing extends from mid-2028 to 2029.

  Comparison

  Attributable self-owned-mine output is around 130kt this year versus a target above 300kt by 2030.

  Risks

  Lithium supply assumptions depend on mine restarts, export conditions and regulatory approvals.

Key data

• Copper scrap rod supply impact~700kt YoY declineEstimated effect of reverse-invoicing constraints on scrap copper rod supply.
• China copper demand growth>1% YoY in 2026; >2% YoY in 2027SMM expectation, supported by exports, power, transport and renewables.
• Spot copper TCRCUS$-200/tSignals challenging 2027 annual treatment-charge negotiations.
• Global AI copper demand~750kt in 2026; 1.25–1.3mnt by 2030Expert estimate.
• Total battery demand3.2–3.3TWh in 2026; >30% growth in 2027Consultant estimate, with ESS as the principal growth driver.
• ESS shipment growth80–90% YoY in 2026; ~50% YoY in 2027Expected battery-demand driver.
• Lithium supply growth~500kt or ~25% YoYExpected in 2026, contingent on mine restarts and approvals.
• CMOC potential copper production1.1mnt in 2029–30; potentially 1.2mnt with overproductionFollowing T&K expansion.
• Baosteel expected steel exports>7mnt this yearCompared with 4.14mnt in 1H and 6.5mnt last year.

Impact & implications

The report suggests that constrained supply and fast-growing demand could support tighter conditions in copper, lithium batteries/ESS and high-end glass fabric. It contrasts these areas with steel, where stronger shipbuilding, machinery and grid-related demand does not fully offset weak property-linked demand, margin pressure and less favorable export economics.

Risks

• A broader relaxation of reverse-invoicing rules could increase domestic scrap copper supply and lower refined-copper consumption next year.
• Lithium supply estimates depend on uncertain mine restarts, permit renewals and regulatory conditions.
• Steel margins face cost pressure, limited customer acceptance of price increases, weak traditional demand and rising trade barriers.
• CMOC faces higher input costs, uncertainty over DRC subsidiary ownership and potential windfall-tax exposure.
• The Saudi steel project remains stalled and may require renegotiated terms if it resumes.