AI Capex Ignites Demand Expectations; U.S. Industrial Recovery Boosts Metals & Mining Sentiment
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AI Capex Ignites Demand Expectations; U.S. Industrial Recovery Boosts Metals & Mining Sentiment
Jefferies notes that Alphabet's massive AI financing and consecutive expansions in U.S. ISM data confirm the start of a new capex cycle; coupled with tariff tailwinds, the firm is bullish on copper, aluminum, and U.S. steel stocks, but warns of Fed hawkish risks triggered by inflation.
- Alphabet raised $84.75 billion in equity financing for AI investment, signaling the arrival of a large-scale capital expenditure cycle.
- The U.S. ISM Manufacturing Index expanded for the fifth consecutive month in May, indicating a pickup in on-the-ground industrial activity across multiple end markets.
- Inquiries from non-specialist investors regarding tech/data center-related metal demand have increased significantly, reflecting a bullish consensus.
- Steel Dynamics (STLD) is up over 60% YTD, with its aluminum business offering upside potential amid record domestic pricing.
- Macro concerns (China slowdown, high oil prices) have kept some investors on the sidelines, despite the sector significantly outperforming the broader market over the past 18 months.
- Strong weekend employment data sparked inflation and Fed hawkishness fears, leading to a late-session pullback in the sector.
Report interpretation
Overview
This report is a weekly briefing from Jefferies' Global Metals & Mining team, focusing on two core themes: the 'Data Center Capex Cycle' and the 'U.S. Industrial Recovery.' The report highlights that as tech giants like Alphabet increase investment in AI infrastructure and the U.S. Manufacturing PMI continues to expand, market demand expectations for metals and mining have risen significantly. Despite macro disruptions such as rebounding inflation and geopolitical tensions, the firm maintains a long-term positive outlook on copper miners, U.S. steel producers, and select aluminum companies, with a specific focus on analyzing the upside in Steel Dynamics' aluminum business.
Core views
Demand Side: An AI-driven capex wave is taking shape. The report observes a significant surge in inquiries from non-specialist investors (particularly funds focused on tech and data centers), with market consensus pointing to an impending major capex cycle substantial enough to positively impact the U.S. economy. Specifically, Alphabet's issuance of $84.75 billion in equity to fund AI investment is viewed as a strong demand signal. Meanwhile, the U.S. ISM Manufacturing Index recorded its fifth consecutive month of expansion in May, indicating recovering on-the-ground industrial activity across various U.S. end markets. Supply & Policy Side: Tariff policy acts as a near-term catalyst for the U.S. steel industry. The report notes that tariff-induced higher U.S. steel prices and increased shipment volumes have become earnings tailwinds. Steel Dynamics (STLD), in particular, has seen its stock rise over 60% YTD, significantly outperforming most U.S. steel peers. Beyond its steel operations, STLD is positioned to deliver growing aluminum output in a record U.S. domestic pricing environment, with the earnings upside from its aluminum business quantified as a rationale for a higher share price. Market Sentiment & Valuation: Although the metals and mining sector has significantly outperformed the broader market over the past 18 months, macro-level concerns (such as risks of a sharp China economic slowdown and high oil prices weakening the U.S. economy) have kept many investors on the sidelines. Furthermore, while the week began with two major positives—AI financing and ISM data—strong weekend employment figures sparked fears of higher inflation and a more hawkish Fed stance, causing a sector pullback heading into the weekend. The report emphasizes that copper miners and U.S. steel producers are supported by both cyclical upswings and structural demand growth.
Analysis framework
The report employs an analytical framework combining 'macro event-driven analysis + micro fundamental verification.' First, it tracks financing activities of tech giants (e.g., Alphabet) and high-frequency macro data (ISM PMI, employment data) to confirm structural changes on the demand side (AI Capex cycle) and cyclical recovery (U.S. industrial rebound). Second, it analyzes earnings resilience in specific sub-sectors (U.S. steel) through the lens of policy (tariffs). Finally, it quantifies potential returns via individual company case studies (e.g., STLD's aluminum business spin-off analysis) and compares overall sector performance against market macro concerns to identify expectation gaps, concluding that 'short-term volatility does not alter the long-term structural bull market.'
Methodology notes
Deriving metal prices and corporate earnings from both the demand side (AI capex, industrial recovery) and the supply/policy side (tariffs, capacity).
Beyond traditional macroeconomic cycles, the report introduces 'tech capital expenditure' as a new demand variable to analyze its pull-through effect on upstream metals (copper, aluminum, etc.), representing a typical exogenous shock analysis within supply-demand balance sheets.
Sum-of-the-Parts (SOTP) Valuation Rethinking
In analyzing Steel Dynamics, the report isolates its aluminum business and quantifies its independent earnings upside potential within the context of a 'record domestic pricing environment' to argue that the overall stock is undervalued. This approach of deconstructing diversified businesses for valuation helps uncover hidden value.
Investor Structure Shifts and Consensus Formation
The report specifically cites the behavioral finance indicator of 'increased inquiries from non-specialist investors' to gauge whether market focus has shifted from traditional cyclical logic to tech-linked logic, suggesting that changing capital flows could drive valuation re-rating.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Steel Dynamics (STLD.US)Beneficiary: Tariffs benefit core steel business; aluminum business operates in a record pricing environment with additional upside.
- Strengths
- Up >60% YTD, outperforming peers; aluminum business earnings potential not fully priced in; tariff protection barriers.
- Comparison
- Significantly outperforming most U.S. steel peers.
- Risks
- Macroeconomic recession leading to demand decline; aluminum price volatility.
- Glencore (GLEN.LN)Beneficiary: Report cites positive risk/reward tradeoff.
- Strengths
- Diversified commodity portfolio; attractive valuation.
- Comparison
- Relatively strong weekly performance (WTD +3.9%).
- Risks
- Geopolitical risk; regulatory risk.
- Barrick Gold (B.US)Beneficiary: Report cites gold margin strength.
- Strengths
- Enhanced profitability in gold operations.
- Risks
- Gold price decline; rising operating costs.
- Copper Miners (Freeport-McMoRan FCX.US, etc.)Beneficiary: Long-term bullish on copper miners, supported by cyclical upswing and structural demand growth (AI/power).
- Strengths
- Massive power demand from AI data centers indirectly drives copper demand; tight supply.
- Risks
- Global economic slowdown; new mine supply exceeding expectations.
Key data
- Alphabet AI Financing Amount$84.75 BillionRaised via equity issuance to fund AI investment; viewed as a bellwether for the industry capex cycle
- U.S. May ISM Manufacturing Index5th Consecutive Month of ExpansionIndicates recovering on-the-ground industrial activity across multiple U.S. end markets
- Steel Dynamics (STLD) YTD Gain>60%Significantly outperforming most U.S. steel peers, driven primarily by tariff-induced steel price hikes and aluminum business prospects
- S&P GSCI Precious Metals Weight Forecast (2026)7.89%Increased from 5.59% in 2025, reflecting expected higher allocation weights for precious metals
- S&P GSCI Industrial Metals Weight Forecast (2026)12.13%Increased from 11.01% in 2025, reflecting improved demand expectations for industrial metals
Impact & implications
For the industry, AI data center construction will transition from 'concept' to 'tangible metal consumption,' with metals like copper (power transmission) and aluminum (structural components/heat dissipation) poised for structural demand increments. For U.S. domestic manufacturers, tariff protection combined with domestic demand recovery creates a dual tailwind, particularly for steel companies with aluminum business exposure. Regarding market style, tech investors beginning to focus on upstream resources may trigger cross-sector capital flows, potentially lifting the valuation floor for mining stocks. However, sticky inflation could lead the Fed to maintain higher rates for longer, increasing capital costs for mining companies and suppressing near-term risk appetite.
Risks
- Risk of a sharp slowdown in the Chinese economy
- Risk of rising oil prices weakening the U.S. economy
- Risk of rising inflation prompting a more hawkish Fed monetary policy
- Uncertainty regarding geopolitical conflicts (war)
What to watch
- 'Green shoots' development trends in the U.S. industrial economy and subsequent data verification
- Actual scale of data center capex deployment and transmission to metal demand
- Fed reaction path to inflation and employment data
- Further developments in China's macroeconomic policies