Supply-Side Dynamics Drive Basic Materials Markets; Gold and Copper Prices Exhibit Resilience
AI summary card
Supply-Side Dynamics Drive Basic Materials Markets; Gold and Copper Prices Exhibit Resilience
JPMorgan highlights that China’s basic materials markets are supply-driven. Gold and copper prices remain resilient amid supportive macro and supply-demand dynamics; aluminum benefits from energy-related structural constraints sustaining high profitability. Key recommendations include Zijin Mining, Chalco, and other industry leaders.
- Gold: A multi-year bull market remains intact; recent pullbacks offer tactical entry points, supported by central bank buying and de-dollarization trends.
- Copper: Supply risk premiums persist, with supply shocks—including Peru’s nationwide energy crisis and delayed ramp-up at Indonesia’s Grasberg mine—intensifying global tightness.
- Aluminum: Structural energy constraints sustain supply tightness; despite inventories reaching their highest level since 2019, margins remain robust.
- Lithium: Energy storage system (ESS) demand is now the primary growth driver; deficits are projected to continue through 2030, though near-term valuations already reflect optimistic expectations.
- Top stock picks: Zijin Mining (volume and price growth), Jiangxi Copper (sulfuric acid revenue offsets declining TC/RC), Chalco (margin expansion).
Report interpretation
Overview
This report focuses on China’s basic materials sector, with the core thesis being 'supply-side dominance.' Despite macroeconomic headwinds, key commodities—including gold, copper, and aluminum—exhibit strong price resilience, driven by favorable macro conditions (e.g., rate-cut expectations, de-dollarization) and persistent supply constraints (e.g., mine disruptions, energy limitations). The report maintains Overweight ratings on select high-quality mining companies, arguing that their production growth and cost discipline can offset potential demand volatility.
Core views
Gold and Copper: Dual Support from Macro and Supply The report views gold as being in a multi-year bull market; although short-term corrections may occur, they present tactical buying opportunities. Key supports include record central bank gold purchases, Fed rate-cut expectations, and global de-dollarization trends. For copper, supply risks remain central to pricing. Nationwide energy crises in Peru, geological delays at Indonesia’s Grasberg mine, technical challenges at Kamoa-Kakula in the DRC, and the legal shutdown of Cobre Panamá in Panama collectively constrain global copper supply. Meanwhile, ex-China demand is expected to recover in 2026, further widening the supply-demand gap. Aluminum: High Profitability Amid Structural Constraints The aluminum sector displays a 'high-inventory, high-margin' profile. Although Chinese aluminum inventories have reached their highest level since 2019, structural energy constraints limit new capacity additions, keeping aluminum prices firm and smelter margins elevated. The report specifically notes that Chalco and China Hongqiao—benefiting from low-cost advantages and integrated operations—stand to gain significantly from this pricing resilience and may enhance shareholder returns via higher dividend payouts. Lithium and Battery Metals: ESS as the Growth Engine The lithium narrative is shifting from electric vehicles (EVs) to energy storage systems (ESS). The report forecasts ESS demand to become the dominant growth driver, with global lithium deficits likely extending through 2030. However, it cautions that current valuations for Chinese lithium stocks already embed substantial optimism, and upstream supply responses and inventory dynamics may cap further upside. Ganfeng Lithium and Tianqi Lithium are highlighted for their ESS-focused strategies and upstream resource self-sufficiency, respectively, but both receive Neutral ratings. Coal and Steel: Defensive Positioning and Consolidation Within coal, China Shenhua is positioned as a high-dividend defensive play, with long-term contracts securing most sales and its coal-chemical business showing signs of inflection. In steel, weak demand and industry restructuring pose challenges; Baosteel maintains earnings resilience through scale advantages and premium product mix, yet broader sector margin recovery remains constrained.
Analysis framework
Supply-Demand Balance Modeling and Scenario Analysis The report applies a classic supply-demand framework to analyze each subsector. For example, in copper analysis, it details mismatches between global mine output disruptions (e.g., specific events in Peru and Indonesia) and regional demand growth (especially ex-China). In lithium analysis, sensitivity analyses under varying lithium price scenarios assess the earnings elasticity of Ganfeng Lithium and Tianqi Lithium. Cost-Curve and Margin Decomposition For aluminum and copper smelters, the report conducts deep cost-structure analysis. For instance, it notes that although Jiangxi Copper faces pressure from falling treatment and refining charges (TC/RC), a doubling of sulfuric acid prices has substantially improved its economics. For Chalco, it emphasizes its production cost of below RMB 13,000/ton against average selling prices of RMB 24,000–25,000/ton, highlighting a wide safety margin. M&A and Capital Allocation Perspective The report places special emphasis on firms’ organic growth and external acquisition capabilities. Zijin Mining is portrayed as a 'high-growth compounding engine,' having rapidly scaled output via acquisitions of Allied Gold and Chifeng Gold, all executed at acquisition costs below industry averages—demonstrating exceptional capital efficiency.
Methodology notes
Supply-Side Dominance in Pricing
The report emphasizes that, in basic materials, when demand is relatively stable or growing slowly, unexpected supply disruptions (e.g., mine accidents, policy-driven shutdowns, energy shortages) often become the primary drivers of price volatility—not traditional demand-led cycles.
Capital Efficiency and Acquisition Returns
Management’s ability to create value is assessed not just by revenue size, but by comparing acquisition costs (e.g., Zijin Mining’s $98/oz vs. industry average $136/oz) and asset turnover speed.
Segmented Valuation and Implied Value Unlock
The report references Jiangxi Copper’s planned spin-off of its copper foil business and Zijin Mining’s international listing, suggesting that segmented valuation (SOTP) or independent listings could unlock value obscured by conglomerate discounts.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Zijin Mining (601899.SS / 2899.HK)Beneficiary: Dual gold-copper price tailwinds and rapid production growth
- Strengths
- Exceptional M&A integration capability, low-cost expansion, expected gold production CAGR of 25%
- Comparison
- Compared to pure gold miners like Shandong Gold, Zijin benefits from copper-gold dual-metal diversification
- Risks
- Geopolitical risk, overseas project execution risk
- Jiangxi Copper (600362.SS / 0358.HK)Beneficiary: Sulfuric acid price surge offsets declining TC/RC
- Strengths
- Sulfuric acid business delivers unexpected upside; copper foil spin-off unlocks embedded value
- Weaknesses
- Smelting treatment/refining charges (TC/RC) in an adverse environment
- Risks
- Large copper price swings, sulfuric acid price reversal
- Chalco (601600.SS / 2600.HK)Beneficiary: Aluminum price resilience + cost advantage = margin expansion
- Strengths
- Integrated operations, low-cost power, rising dividend payout ratio
- Comparison
- Cost curve positioned left-of-center versus peers, enhancing resilience
- Risks
- Energy price volatility, tightening environmental regulations
- China Hongqiao (1378.HK)Beneficiary: High margins and stable dividends
- Strengths
- Cost leadership, strong cash flow generation, dividend yield >6%
- Risks
- Aluminum price decline, rising raw material costs
- Ganfeng Lithium (002460.SZ / 1772.HK)Neutral: ESS demand growth, but valuations already reflect optimism
- Strengths
- Strong ESS battery business growth, comprehensive upstream resource positioning
- Weaknesses
- Supply response may weigh on prices
- Risks
- Lithium price volatility, new project ramp-ups below expectations
- Tianqi Lithium (9696.HK)Neutral: High upstream self-sufficiency, but near-term guidance downgraded
- Strengths
- Ownership stake in Greenbushes, full exposure to lithium carbonate price increases
- Weaknesses
- Greenbushes production guidance revised downward; no downstream buffer
- Comparison
- More purely upstream-exposed than Ganfeng
- Risks
- Single-asset dependency, direct profit impact from lithium price declines
- China Shenhua (601088.SS / 1088.HK)Neutral: High-dividend defensive holding
- Strengths
- Long-term coal contracts lock in profits, dividend yield >5%, coal chemical business recovering
- Weaknesses
- Limited upside potential for coal prices
- Risks
- Coal price policy intervention, synergy realization below expectations
- Baosteel (600019.SS)Neutral: Resilient player amid sector-wide weakness
- Strengths
- Scale advantages, high share of premium products, exports balancing domestic demand
- Weaknesses
- Slow industry capacity rationalization, constrained margin recovery
- Comparison
- Outperforms most loss-making small-to-mid-sized steel producers
- Risks
- Continued residential property demand slump, trade friction
Key data
- Zijin Mining Gold Production CAGR15% (2023–2025), accelerating to 25% (through 2028)Driven by Allied Gold acquisition and organic growth
- Zijin Mining Earnings CAGR64% (2025–2028 base case)Based on gold price resilience and volume growth
- Spot Sulfuric Acid Price~RMB 2,000/tonApproximately doubled from prior levels, significantly improving Jiangxi Copper’s smelting economics
- Chalco Production Cost<RMB 13,000/tonWell below average selling price of RMB 24,000–25,000/ton, supporting high gross margins
- China Residential Property Sales Area YoY-10.4% (Q3 2026)Reflecting continued softness in domestic traditional construction material demand
Impact & implications
The report argues that investment logic in basic materials is shifting from pure 'demand beta' to 'supply alpha.' Companies possessing high-quality mineral assets, low-cost operational capability, and superior M&A integration skills (e.g., Zijin Mining, Chalco) will generate outperformance amid volatile but elevated commodity prices. Additionally, fluctuations in by-product prices (e.g., sulfuric acid) are increasingly consequential for smelter profitability, warranting investor attention to such hedging effects. While long-term lithium deficits persist, near-term valuation excess poses downside risks; investors should monitor actual ESS deployment progress closely.
Risks
- Global macroeconomic recession leading to weaker-than-expected commodity demand
- Escalating geopolitical conflict disrupting overseas mine operations or supply chains
- Fed monetary policy path deviating from expectations, impacting gold prices and USD strength
- Underperformance of China’s property policy, dragging down ferrous metal demand
- Shifts in new-energy technology roadmaps (e.g., solid-state batteries, sodium-ion batteries) dampening lithium demand
What to watch
- Resolution timeline of Peru’s energy crisis and its real-world impact on copper supply
- Resumption schedules for Indonesia’s Grasberg mine and Panama’s Cobre Panamá
- Pace of drawdown in Chinese aluminum social inventories
- Continuity of central bank gold buying globally
- Monthly data on China’s energy storage (ESS) installation volumes