China demand remains soft, but coal and some metals are supported by summer factors, policy, and El Niño
AI summary card
China demand remains soft, but coal and some metals are supported by summer factors, policy, and El Niño
Morgan Stanley believes China's economy is showing a "two-speed" pattern of strong export production but weak domestic demand and property, continues to prefer BHP.AX and WHC.AX among Australian miners, and is watching El Niño's impact on supply and demand for copper, aluminum, zinc, lithium, and thermal coal.
- China's industrial production rose 4.5% YoY in May, but retail sales, investment, and the property chain remained weak, with 2Q GDP expected at about 4.4% YoY.
- New property starts fell 24.7% YoY in May, sales area fell 14.1%, and the team expects property indicators may still weaken in 3Q.
- Steel activity slowed: crude steel output fell 2.7% YoY in May, apparent domestic steel consumption fell 8.5% YoY, and iron ore imports were flat YoY, though port inventories remained high.
- Coal has stronger near-term support: May coal output fell 1.7% YoY and rose 3% MoM, while summer utility restocking, domestic safety constraints, and El Niño create upside demand risk.
- NOAA has confirmed El Niño as this year's event, with a 63% probability of a "very strong" event, which could disrupt copper in Chile, hydropower in Zambia, aluminum and zinc in Yunnan, and some lithium supply.
Report interpretation
Overview
This report summarizes China's macro, property, industrial production, trade, and commodity data, and maps these data to Australian materials and mining stocks. The core backdrop is diverging growth momentum in China: export-oriented production remains resilient, while domestic consumption, investment, and the property chain are weak. The report also discusses summer power demand, coal restocking, steel and iron ore demand, aluminum and copper trade, and the potential impact of El Niño on metal supply and thermal coal demand.
Core views
Morgan Stanley remains selectively constructive on the broader materials and mining sector. China's property and steel demand remain the main drags, but policy may add support in 3Q through fiscal capital expenditure, AI computing networks, data centers, and smart grids. At the stock level, BHP.AX is viewed as the best diversified mining exposure, supported by low-cost WAIO cash flow, 330Mtpa expansion optionality, valuation upside in Copper SA, and asset release potential; WHC.AX could benefit from easing logistics disruptions, weak Southeast Asian hydropower, and stronger thermal coal demand under a strong El Niño scenario. Risk-reward in lithium is seen as relatively balanced, with PLS preferred over IGO.
Analysis framework
The report uses a combination of top-down and bottom-up analysis: first tracking China's macro, property, industrial production, and trade data, then assessing their supply-demand impact on commodities such as steel, iron ore, coal, aluminum, copper, and lithium, and finally mapping these to relative ratings and preference rankings for Australian mining stocks.
Methodology notes
Two-speed economy and policy capex
Combines resilient export production, weakening domestic demand, soft property, and expectations for 3Q fiscal capital spending to judge marginal changes in resource demand.
Output, imports, exports, inventories, and arbitrage windows
Uses data such as steel output, iron ore imports, coal output and imports, aluminum output and exports, and copper imports and inventories to assess short-term supply-demand strength.
Two-way weather shocks to supply and demand
El Niño may disrupt metal supply in Chile, Zambia, Peru, and Yunnan in China, while also boosting Asian thermal coal demand through high temperatures and weak hydropower.
From commodity exposure to stock ranking
The report maps commodity and macro views to relative preferences among stocks such as BHP.AX, DRR.AX, RIO.AX, FMG.AX, WHC.AX, PLS, and IGO.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- BHP.AXTop diversified mining pick, rated OW.
- Strengths
- Low-cost WAIO cash flow, 330Mtpa expansion optionality, Copper SA valuation upside, potential asset value release, and better long-term growth than peers.
- Weaknesses
- Still exposed to China's steel and iron ore demand cycle.
- Comparison
- Ranks first in iron ore preference, ahead of DRR.AX, RIO.AX, and FMG.AX.
- Risks
- Further weakness in China's property and steel demand, high iron ore inventories, and capex or project execution risk.
- DRR.AXSecond in iron ore preference, rated OW.
- Strengths
- Relatively favored within iron ore exposure.
- Weaknesses
- The report does not provide a detailed single-stock fundamental discussion.
- Comparison
- Ranks below BHP.AX and above RIO.AX and FMG.AX.
- Risks
- Iron ore prices, steel demand, and pressure from high China port inventories.
- RIO.AXThird in iron ore preference, rated EW.
- Strengths
- Large diversified mining exposure.
- Weaknesses
- Less preferred relative to BHP.AX and DRR.AX.
- Comparison
- Above FMG.AX, but below BHP.AX and DRR.AX.
- Risks
- Slowing iron ore demand, elevated inventories, and weakness in China's property chain.
- FMG.AXFourth in iron ore preference, rated UW.
- Strengths
- Provides iron ore price exposure.
- Weaknesses
- Least preferred in the report's ranking.
- Comparison
- Below BHP.AX, DRR.AX, and RIO.AX.
- Risks
- Single-commodity iron ore exposure, price downside, and weak China steel demand.
- WHC.AXTop coal exposure pick, rated OW.
- Strengths
- May benefit from reduced logistics disruptions in NSW/QLD, weak Southeast Asian hydropower, and stronger thermal coal demand under a strong El Niño scenario.
- Weaknesses
- Coal prices and changes in import arbitrage may affect marginal demand.
- Comparison
- The report identifies it as the preferred coal exposure.
- Risks
- Coal import prices, recovery in domestic coal output, and uncertainty over policy and weather paths.
- PLSRated EW in lithium, but preferred over IGO on a relative basis.
- Strengths
- Risk-reward in lithium is seen as relatively balanced.
- Weaknesses
- Lacks clear upside catalysts, and the lithium price cycle remains uncertain.
- Comparison
- Preferred over IGO.
- Risks
- Lithium prices, the path of supply disruptions, and uncertainty over demand recovery.
- IGORated UW, below PLS.
- Strengths
- Has lithium-related exposure.
- Weaknesses
- The Greenbushes LOM plan remains a key uncertainty.
- Comparison
- The report prefers PLS over IGO.
- Risks
- Project planning, lithium prices, and execution uncertainty.
- Thermal coalNear-term fundamentals are relatively supported.
- Strengths
- Summer peak power demand, utility restocking, inventory days below required levels, and El Niño may boost demand.
- Weaknesses
- Demand is seasonal, and import arbitrage and price changes will affect trade flows.
- Comparison
- Has stronger near-term support relative to property-chain commodities.
- Risks
- Coal price declines, recovery in imports, easing domestic output constraints, or weaker-than-expected weather.
- CopperEl Niño creates upside supply risk and price support.
- Strengths
- China physical demand remains steady, with Yangshan copper premiums holding at US$60-75/t.
- Weaknesses
- Imports are slightly down MoM, and inventory drawdowns have slowed.
- Comparison
- Receives relatively strong attention under the weather disruption framework.
- Risks
- Flooding in Chile, hydropower stress in Zambia, smelting margins, and uncertainty over global growth.
- Steel and iron oreDemand is weak, and inventories remain a constraint.
- Strengths
- Steel exports improved MoM, and iron ore port inventories have started to decline.
- Weaknesses
- Apparent domestic steel consumption fell 8.5%, property and infrastructure demand are weak, and port inventories remain high.
- Comparison
- Lacks clear upside momentum relative to coal and weather-disrupted copper.
- Risks
- Continued decline in China's property sector, steel mill production cuts, export restrictions, and European trade barriers.
Key data
- China May industrial production+4.5% YoYApril was +4.1%; PMI was 50, below April's 50.3.
- China 2Q GDP tracking estimateabout +4.4% YoYThe economics team expects policy to step up capex-oriented fiscal spending from 3Q.
- China May new property starts-24.7% YoYSales area fell 14.1%, completions fell 19.6%; the team expects weaker conditions in 3Q.
- May fixed asset investment-12.5% YoYApril was -9.4%; highway fixed asset investment fell 13.8%.
- May crude steel output-2.7% YoY5M26 output fell 3.9% YoY; apparent domestic steel consumption fell 8.5%.
- May steel exports10.3Mt, -2% YoY, +9% MoM5M26 cumulative volume was 44.6Mt, down 8% YoY.
- May iron ore imports98Mt, flat YoY, MoM -6%China port inventories have started to decline but remain elevated.
- May aluminum output3.9mnt, +1.7% YoY, +0.5% MoMDriven by resumed production in Liaoning and new capacity in Inner Mongolia; full-year output is expected to remain high.
- May aluminum and aluminum product exports632kt, +16% YoY, +6% MoMThe highest level since November 2024, with overseas supply disruptions widening export arbitrage.
- May coal output397.2mnt, -1.7% YoY, +3% MoMSeasonal restocking drove a MoM recovery, but mine accidents and safety regulation may constrain near-term supply.
- May thermal power generation472.6bn kWh, +2.1% YoYAccounted for 60% of total power generation, down from 62% in April.
- May coal imports33Mt, -8% YoY, +1% MoMYear-to-date volume was 183Mt, down 3% YoY; import arbitrage reopened after domestic coal prices rose.
- Coal inventories at the six major coastal power groups+1.74% WoW, 17.96 daysDays of inventory remain below the nationwide required 20 days.
- May copper and copper product imports446kt, -1% MoM, +4% YoYYangshan copper premium at US$60-75/t indicates physical demand remains fairly steady.
- El Niño intensity probability63% probability of a very strong eventNOAA has confirmed El Niño this year, which may create upside risk for metal prices.
Impact & implications
For portfolios, the report suggests investors should not simply equate weak China demand with a broad bearish view on mining. The property and steel chains do weigh on iron ore and steel demand, but policy capex, AI and grid investment, summer power demand, coal restocking, and weather disruptions may provide pockets of support. Positioning therefore favors low-cost, diversified, higher-quality assets or names supported by coal demand, while remaining cautious on exposures tied to high inventories, the property chain, and single commodities.
Risks
- China's domestic demand, consumption, investment, and property chain continue to weaken, dragging steel, iron ore, and related miners' earnings.
- The pace or scale of 3Q policy capex implementation may fall short of expectations.
- Iron ore inventories at ports remain high, and weak apparent steel consumption may weigh on prices.
- Coal demand support depends on summer power demand, restocking, and hydropower conditions; if weather underwhelms, upside elasticity may be limited.
- Domestic coal mine safety regulation, mine accidents, and logistics disruptions may simultaneously affect supply and price volatility.
- El Niño's impact on copper, aluminum, zinc, lithium, and coal varies by region, and the weather path is uncertain.
- The report discloses that Morgan Stanley has investment banking or potential business relationships with several covered companies, and investors should consider conflict-of-interest disclosures.
What to watch
- Whether China's 3Q property sales, new starts, completions, and household home-buying confidence continue to weaken.
- The actual rollout of fiscal capex, AI computing networks, data centers, smart grids, and projects related to the "Six Networks".
- Steel exports, net exports, European import restrictions, CBAM, and changes in regional spreads.
- The pace of China iron ore port inventory drawdown and changes in pig iron and crude steel output at steel mills.
- Coal restocking by utilities, inventory days at the six major power groups, summer power demand, Southeast Asian hydropower, and the import arbitrage window.
- The strength of El Niño and its impact on copper mines in Chile, hydropower in Zambia, aluminum and zinc in Yunnan, and lithium/zinc supply in Peru and Chile.
- Follow-up project, rating, and valuation updates for names such as BHP.AX, WHC.AX, PLS, and IGO.