Weak Domestic Demand and K-Shaped Divergence Persist; Gold, Copper, and Aluminum Preferred Within Materials
AI summary card
Weak Domestic Demand and K-Shaped Divergence Persist; Gold, Copper, and Aluminum Preferred Within Materials
J.P. Morgan believes China's July macro data were weak, but valuations and supply constraints support materials stocks; against pressure on real estate and steel, it favors gold, copper, and aluminum, and believes lithium's downside risks are largely priced in.
- New real estate starts fell 29% YoY in July and 24% YoY over the first seven months, while real estate investment declined 29% YoY.
- Fixed-asset investment fell 14% YoY in July, with both manufacturing and infrastructure investment weakening, indicating continued soft domestic demand.
- Aluminum supply recovery remains slow and social inventories continue to decline; the report expects greater upside price risk in the fourth quarter.
- Steel output, exports, and profits are all under pressure; without policy delivery, improved demand, and lower costs, steel mill profitability is unlikely to recover materially.
- Lithium prices have found support around RMB140k/t, while falling inventories and resilient downstream demand skew near-term price risks to the upside.
Report interpretation
Overview
The report assesses basic-materials demand and supply based on China's July NBS and customs data. J.P. Morgan notes that continued weakness in real estate, fixed-asset investment, and steel demand reflects a K-shaped economic divergence; however, materials stocks outperformed the broader market during the month, driven primarily by declining expectations for Fed rate hikes, positioning, and valuation support rather than improved end demand. The report therefore advocates structural positioning within the sector, favoring gold, copper, and aluminum.
Core views
The real estate downturn and slower investment continue to weigh on strongly cyclical products such as steel, but aluminum supply recovery is constrained by Middle East restarts, logistics, and the progress of overseas projects, while inventory drawdowns are improving fundamentals. Coal is supported by safety inspections, summer power consumption, and tight Indonesian supply, and may remain range-bound in the near term. Lithium market sentiment is weak, but price support around RMB140k/t, declining inventories, and resilient energy-storage battery production schedules lead the report to conclude that downside risks are overstated. The report favors Zijin Mining's copper-gold exposure and the aluminum exposure of Chalco and China Hongqiao.
Analysis framework
Combines NBS production, real estate, and fixed-asset investment indicators with customs import-export data, social inventories, industry capacity restart schedules, steel mill profitability, and valuation comparisons to assess demand, supply, and price drivers for different metals.
Methodology notes
Uses high-frequency macro indicators, including real estate, fixed-asset investment, and industrial production, to measure the strength of end demand.
The report uses changes in new starts, completions, real estate investment, and manufacturing and infrastructure investment to assess the impact of Chinese domestic demand on steel and basic materials.
Combines output, social inventories, project commissioning, and restart progress to assess commodity price balance.
This framework is mainly used for aluminum, coal, and lithium, emphasizing the price support from constrained supply and inventory drawdowns.
Compares valuation levels across global mining, steel, aluminum, and lithium-related companies.
The report believes valuation support for base-metals sectors and rising investor interest may drive capital rotation within the materials sector.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Chinese Materials StocksOverall constructive view maintained
- Strengths
- Valuation support, rising investor interest, and supply constraints for certain metals.
- Weaknesses
- Weak real estate, fixed-asset investment, and steel end demand.
- Comparison
- The MSCI China Materials Index rose 3.4% during the month, outperforming the HSCEI's 2.0%.
- Risks
- Sector performance could come under pressure if macro demand weakens further or liquidity conditions deteriorate.
- Zijin MiningTop copper-gold pick
- Strengths
- Offers exposure to both copper and gold; the report cites FY27E P/E of approximately 8x.
- Weaknesses
- Company-specific operating and valuation details are not elaborated in the body of this report.
- Comparison
- Compared with steel assets more exposed to real estate-driven demand pressure, copper-gold exposure better fits the report's structural preference.
- Risks
- Copper and gold price volatility, mine operations, and changes in market risk appetite.
- Chalco and China HongqiaoPreferred aluminum exposure
- Strengths
- Aluminum inventories continue to decline, supply recovery is gradual, and fourth-quarter price upside risk is increasing.
- Weaknesses
- The third quarter may still see range-bound trading due to seasonally weak demand.
- Comparison
- Aluminum fundamentals are in a tighter balance than the surplus situation previously feared by the market.
- Risks
- Commissioning of Indonesian projects, Middle East capacity restarts, and changes in domestic supply discipline.
- Chinese Steel StocksCautious
- Strengths
- Crude steel production cuts may partially ease supply pressure.
- Weaknesses
- Weak domestic demand, slowing export growth, rising coking coal costs, and declining steel mill profits.
- Comparison
- Compared with copper, gold, and aluminum, the conditions for a steel earnings recovery are more demanding.
- Risks
- Slower overseas procurement, price cuts in Southeast Asia, tighter EU import regulation, and insufficient policy delivery.
- Lithium Value ChainNear-term opportunity skewed bullish
- Strengths
- Price support has emerged around RMB140k/t, downstream demand is resilient, and inventories continue to decline.
- Weaknesses
- The market remains concerned about the 2027 supply-demand balance, and sentiment is still weak.
- Comparison
- The report believes the market may be overpricing lithium price downside.
- Risks
- Mine restarts, arrivals of Zimbabwean concentrate, seasonally weaker electric-vehicle demand, and changes in supply-demand expectations.
Key data
- China Real Estate New Starts-29% YoY in July 2026; -24% YoY over the first seven monthsJune was -26% YoY, indicating a continued decline in real estate demand.
- China Real Estate Completions-20% YoY in July 2026; -23% YoY over the first seven monthsSlightly improved from -25% YoY in June, but remains at a low level.
- Fixed-Asset Investment-14% YoY in July 2026; -7% YoY over the first seven monthsManufacturing investment fell 4% YoY in July, while infrastructure investment fell 15% YoY.
- China Primary Aluminum Output3.9mt in July 2026, +3.8% YoYThe report expects annualized 2026 output to decline to 46–47mt.
- China Aluminum Social Inventory0.90mt in the second week of August 2026Continued drawdown from the 1.47mt peak at the end of April.
- China Raw Coal Output343mt in July 2026, -10% YoY; -3% YoY over the first seven monthsRaw coal imports rose 20% YoY to 42.7mt during the same period.
- China Crude Steel Output77mt in July 2026, -3.6% YoY; -3.1% YoY over the first seven monthsThe proportion of profitable steel mills fell from 40% in mid-July to 34% in mid-August.
- Lithium Carbonate Price and InventorySpot prices found support around RMB140k/t; weekly inventory was 72kt or 94kt on August 13The two inventory figures correspond to SMM's old and new samples.
Impact & implications
The report's key implication is that weak domestic demand does not support a directional bullish view across all cyclical commodities; investment opportunities are more likely to arise from supply discipline, inventory drawdowns, valuations, and capital rotation. Steel continues to face a triple pressure from demand, exports, and costs; aluminum fundamentals are relatively more resilient, while lithium offers trading opportunities driven by sentiment recovery and destocking. Gold and copper are viewed as superior structural exposures.
Risks
- Further deterioration in China's real estate new starts, investment, and fixed-asset investment.
- Steel exports being affected by slowing overseas demand, regional price cuts, and tighter EU regulation.
- Aluminum supply increasing more than expected due to Indonesian project commissioning or accelerated Middle East restarts.
- Lithium mine restarts or faster new supply growth weakening price support around RMB140k/t.
- Coal price volatility arising from safety inspections, weather, power demand, and changes in import supply.
- Changes in global risk appetite, Fed policy expectations, and geopolitical conflicts affecting metal prices and materials-stock valuations.
What to watch
- Real estate new starts, completions, investment, and home-price stabilization over the coming months.
- Whether manufacturing and infrastructure fixed-asset investment can improve.
- Aluminum social inventories, domestic supply discipline, Indonesian project launches, and the pace of Middle East capacity restarts.
- Coal mine restart progress, regional rainfall, port inventories, and Indonesian supply.
- Steel mill profitability, operating rates, pig iron output, and changes in steel exports.
- Lithium inventories, energy-storage battery production schedules, Zimbabwean concentrate arrivals, and mine restart developments.