China Basic Materials Conditions Improved Marginally in May, with Strong Exports Offsetting Weak Domestic Demand

Overview

This report is Goldman Sachs' monthly monitoring of China's basic materials sector, based on surveys of more than 60 supply-chain contacts, tracking forward orders, inventories, prices, margins, and supply-demand changes among end users and upstream producers. Overall performance in May was better than typical seasonality, driven mainly by demand related to exports, autos, home appliances, machinery, and power, offsetting relatively weak domestic demand; infrastructure projects under construction led to a slight pickup in construction demand, and developers' assessments of new starts and land acquisition plans also showed marginal signs of improvement.

Core views

The core view is that China's basic materials sector saw broad but uneven marginal improvement in May. On the order side, the share of end-market orders improving month over month rose from 27% in April to 45% in May, and the share of basic materials orders improving rose from 42% to 58%. By category, coal, steel, building materials, and paper packaging improved more noticeably; aluminium was supported by exports and some manufacturing demand, while copper order momentum weakened because prices moved to high levels. On the supply side, annualized primary aluminium output exceeded 47 million tons, steel saw localized moderate production cuts, and copper scrap supply remained constrained by tighter regulation.

Analysis framework

The report combines monthly channel checks with high-frequency industry data, cross-validating feedback from producers, traders, downstream manufacturers, property developers, power companies, and industry associations against prices, inventories, shipments, production, and margin data to judge order trends, inventory positioning, supply-demand balance, and margin changes.

Methodology notes

• Channel checksGoldman Sachs China Basic Materials Monthly Monitor

  Forward order and inventory survey

  Using feedback from more than 60 supply-chain contacts to track month-over-month order trends in end markets and upstream materials industries, inventory levels versus normal, and the direction of inventory changes.

• High-frequency dataYear-on-year and month-on-month demand tracking

  Demand changes across cement, steel, copper, aluminium, and other categories

  Weekly or monthly industry data are used to validate survey feedback, for example that in the first half of May, cement and construction steel demand was down 3%-4% year on year, copper was down 7%, while aluminium and sheet steel were up 5%-7% year on year.

• Valuation and risk12-month target price framework

  Valuation peer table and target price methodology

  The report's valuation peer table and target price notes are based on a 12-month time frame, but this summary does not extract single-company ratings or target prices.

Asset mapping & comparison

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

• Steel

  Benefiting from autos, home appliances, exports, and moderate production cuts

  Strengths

  Orders improved month over month, sheet steel demand grew year on year, and unit gross margin improved versus April.

  Weaknesses

  Construction steel demand is still down year on year, and order improvement is weaker than normal seasonality.

  Comparison

  Better prices and margins than April; demand is still not strong relative to historical seasonality.

  Risks

  Weakening enforcement of production cuts, continued softness in construction demand, and a pullback in export demand.

• Coal

  Benefiting from early inventory restocking by power plants and coal chemical demand

  Strengths

  Order improvement is stronger than normal seasonality, thermal coal prices rose, and power plants are restocking ahead of the summer peak.

  Weaknesses

  Daily power generation consumption was basically flat month over month, and metallurgical coal demand was mixed.

  Comparison

  Stronger price and demand feedback than April.

  Risks

  Summer demand falls short of expectations, changes in imported coal prices, and a pullback in non-power demand.

• Cement and building materials

  Affected by infrastructure projects under construction and marginal improvement in property

  Strengths

  Shipments improved from a low base month over month, and project start rates recovered.

  Weaknesses

  New projects are still lacking, funding constraints remain, and inventories are in a relatively high range.

  Comparison

  Improved versus April, but still below last year on a year-on-year basis.

  Risks

  New property starts do not materialize, price increases cannot be passed through, and overcapacity governance advances slowly.

• Aluminium and alumina

  Strong export orders but high supply

  Strengths

  Export orders for semi-finished and finished products are strong, and demand from autos, cables, packaging, and energy storage remains steady.

  Weaknesses

  Some domestic industrial demand is weakening, annualized primary aluminium output rose to 47.1 million tons, and aluminium spreads declined month over month.

  Comparison

  Demand is better than copper, but profitability is worse than earlier periods.

  Risks

  Continued supply release, slower export orders, and new alumina capacity pressuring prices.

• Copper

  High prices are suppressing orders

  Strengths

  Demand from data centers, exports, and some energy-related end markets remains stable, and inventories are declining.

  Weaknesses

  Orders declined month over month and were weaker than seasonality; copper prices at Rmb106k/ton suppressed downstream contract signings, and TCRC remains negative.

  Comparison

  Clearly weaker order performance than aluminium and steel.

  Risks

  High copper prices further suppress demand, processing fees deteriorate, and copper scrap supply remains tight.

• Lithium

  Supply-demand balance is tightening

  Strengths

  Battery and cathode production scheduling improved, a shortfall may emerge in May, and lithium carbonate prices rose.

  Weaknesses

  Some energy storage projects have been suspended or delayed due to deteriorating returns, and downstream negotiation over cost pass-through continues.

  Comparison

  The shortage phase seen in February-March has eased; April was roughly balanced, and May has tightened again.

  Risks

  Supply increases after Zimbabwe lithium concentrate exports resume, and demand destruction from price increases.

• Paper packaging

  Shipments improved but margins are under pressure

  Strengths

  Summer orders, the 618 shopping festival, and exports of electronics and textile finished goods in South China supported shipment improvement.

  Weaknesses

  Rising costs for waste paper, coal, and chemical additives kept ton net profit negative.

  Comparison

  Sales improved, but profitability lagged demand-side performance.

  Risks

  Costs continue to rise, price increases cannot be fully passed through, and export demand weakens.

Key data

• Improving end-order ratio45%Respondents in May expected month-over-month improvement, up from 27% in April; the share expecting a month-over-month decline was 9%, down from 36% in April.
• Improving basic materials order ratio58%Higher than 42% in April; the share expecting a decline was 18%, down from 30% in April.
• China annualized primary aluminium output47.1 million tonsApril annualized level, driven by restarts, overproduction, and net additions from replacement projects.
• Finished steel inventory at mills4.2 million tonsAs of May 15, down 11% month over month.
• Domestic thermal coal spot priceRmb835/tonQHD5500 price rose 8.6% over the past month.
• Copper end-demanddown 7% y/y, down 5% m/mHigh-frequency processing data in May, affected by order suppression from high copper prices.
• Lithium carbonate spot priceup 13% m/mAs of May 15, China spot lithium carbonate prices rose, and Guangzhou futures prices increased 6% month over month.
• Cement project start rate47%-50%Feedback from construction distributors in mid-May; improved month over month, but new projects remain insufficient.

Impact & implications

For investment and industry judgment, the implication is that May basic materials demand was not a broad-based recovery, but a structural improvement supported by exports and advanced manufacturing-related demand. Price or margin improvement in steel, coal, and lithium carries a more positive short-term signal; although aluminium has export support on the demand side, high supply and narrowing spreads weaken earnings elasticity; copper is the main drag in this round of improvement because high prices suppressed demand and orders remained weaker than seasonality. The repair in the domestic construction chain remains modest, and investors should watch whether infrastructure funding, new property starts, and building material prices can continue to improve.

Risks

• Domestic demand recovery falls short of expectations, especially if new property starts, land acquisition, and building material demand fail to improve sustainably.
• If export orders slow due to overseas demand, trade policy, or exchange-rate changes, the main support for this round of improvement may weaken.
• High copper prices, rising lithium prices, and other raw material price increases may lead to downstream demand destruction or slower restocking.
• Supply increases in aluminium, alumina, iron ore, and similar materials may pressure prices and margins.
• If production cuts, capacity reductions, or governance of non-compliant capacity in cement and steel are not enforced effectively, margin improvement may be difficult to sustain.

What to watch

• Whether the share of end orders improving in June continues to exceed normal seasonality.
• The sustainability of export-related orders across aluminium products, steel products, paper packaging, electronics, and textile supply chains.
• Whether new property starts, land acquisition plans, and infrastructure project start rates move from marginal improvement to substantive improvement.
• The enforcement intensity of moderate steel production cuts and changes in finished steel inventories.
• Whether demand from power grids, autos, and air conditioners continues to slow at high copper prices.
• The impact on China's lithium supply-demand balance after Zimbabwe lithium concentrate exports resume and arrive at ports.
• Summer peak coal demand and the pace of power-plant restocking.