China's central bank buys gold on dips, extending purchases to the 20th consecutive month

Overview

This report is Morgan Stanley's weekly monitor of the Greater China materials industry, covering gold, base metals, lithium battery materials, steel, cement, coal and glass. Key information includes China's 20th consecutive month of gold purchases, China's policies related to carbon peaking and production safety, Indonesia's tighter export controls on FeNi and NPI, and weekly changes in the prices and inventories of various commodities.

Core views

Policy-driven buying on the demand side of gold remains the most prominent signal this week. China's central bank continued to increase its holdings amid price volatility, reinforcing the allocation rationale for gold as a reserve asset. In base metals, higher copper and aluminum prices accompanied by lower inventories indicate marginal short-term improvement in supply and demand. Lithium battery material prices continued to fall, reflecting unresolved supply-demand pressure. Steel, coal, cement and glass prices were generally flat or fluctuated modestly, with the sectors more affected by policy, inventory and demand timing.

Analysis framework

The report adopts a weekly monitoring framework that combines policy events, commodity prices, inventory changes and information on covered industry companies to identify short-term marginal changes in the Greater China materials industry. Price and inventory indicators primarily use week-on-week changes, while the policy section focuses on China's carbon-peaking, production-safety, vehicle-tax-incentive adjustment and Indonesia's nickel-product export-control measures.

Methodology notes

• Industry weekly monitoringWeekly tracking of prices and inventories

  Assess short-term marginal changes in supply and demand through week-on-week changes in commodity prices and inventories.

  The report lists price or inventory changes for copper, aluminum, lithium, steel, cement, coal and glass to monitor materials-industry conditions and supply-demand pressure.

• Rating frameworkMorgan Stanley relative-rating framework

  Overweight, Equal-weight, Not-Rated and Underweight correspond to expected risk-adjusted total returns over the next 12-18 months relative to the covered industry universe.

  The disclosure section explains that this rating framework is not equivalent to the traditional Buy, Hold and Sell categories, although regulatory disclosures map it to corresponding classifications.

Asset mapping & comparison

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

• Gold and gold-mining companies

  Supported by continued buying from China's central bank and stable gold prices.

  Strengths

  Consecutive central-bank purchases reinforce medium- to long-term allocation demand, while prices were essentially flat week on week.

  Weaknesses

  The report provides no further catalyst for price appreciation or earnings-sensitivity estimates for any single company.

  Comparison

  The gold sector's short-term price performance was more stable than that of lithium battery materials.

  Risks

  A slowdown in central-bank gold purchases or an increase in real interest rates could weaken the gold-allocation rationale.

• Copper and aluminum

  Higher base-metal prices and lower inventories reflect marginal short-term improvement in supply and demand.

  Strengths

  Shanghai copper and Shanghai aluminum prices rose week on week, while inventories declined concurrently.

  Weaknesses

  The report provides only weekly changes and lacks validation of demand sustainability.

  Comparison

  Base metals outperformed lithium battery materials this week.

  Risks

  Weaker macroeconomic demand, renewed inventory accumulation or weaker-than-expected policy implementation could weigh on prices.

• Lithium battery materials

  Declining lithium-salt and lithium-hydroxide prices indicate continued supply-demand pressure.

  Strengths

  Coverage of both industrial-grade and battery-grade products provides visibility into price pressure across the industrial chain.

  Weaknesses

  The week-on-week declines for major products ranged from 4.6% to 5.8%.

  Comparison

  Lithium battery materials performed more weakly in the short term than copper, aluminum and gold.

  Risks

  If demand recovers more slowly than supply is rationalized, prices and profit margins may remain under pressure.

• Steel, cement, coal and glass

  Affected by China's energy-conservation and carbon-reduction, production-safety and property-and-infrastructure demand conditions.

  Strengths

  The carbon-peaking action plan may bring supply-side optimization and constraints on energy-intensive capacity.

  Weaknesses

  Most prices fluctuated only modestly, and demand momentum was not pronounced.

  Comparison

  These sectors were driven more by policy and inventories than precious and base metals.

  Risks

  Insufficient demand, inventory accumulation and changes in the pace of policy implementation could affect sector conditions.

Key data

• China's central-bank gold holdingsup 480k oz month on monthGold purchases continued for the 20th consecutive month.
• Gold priceUS$4,124/ozEssentially flat week on week.
• Shanghai copperprice +1.1% week on week, inventories -26.1% week on weekBase-metal inventories declined significantly.
• Shanghai aluminumprice +1.6% week on week, inventories -4.8% week on weekPrices rose alongside a decline in inventories.
• Industrial-grade/battery-grade lithium hydroxide-5.8% / -5.3% week on weekLithium battery material prices continued to decline.
• Industrial-grade/battery-grade lithium carbonate-4.7% / -4.6% week on weekLithium carbonate prices also weakened.
• Shanghai hot-rolled/cold-rolled steelHRC +0.3% week on week, CRC -0.1% week on weekSteel prices diverged but volatility remained limited.
• Cement priceRmb310/tAs of July 10, down slightly by 0.2% week on week.
• QHD5500 coal priceRmb721/tAs of July 10, down 0.8% week on week, with inventories falling to 6.8mnt.
• Average 2400tex fiberglass priceRmb4,067/tDown 2.8% week on week.
• 3.2mm tempered solar glassRmb15.0/m2Price remained unchanged.

Impact & implications

For investors, policy-driven buying in the gold sector and the reserve-asset rationale remain worth monitoring. Declining copper and aluminum inventories may support short-term price resilience, while continued declines in lithium battery material prices indicate ongoing profitability pressure across the related industrial chain. At the policy level, the carbon-peaking action plan may promote supply constraints and technological upgrades in energy-intensive materials industries, while Indonesia's nickel export controls could affect supply expectations for nickel pig iron and NPI.

Risks

• A weaker-than-expected recovery in materials-industry demand could make price increases unsustainable.
• Continued supply pressure in lithium battery materials could drive further price declines and compress profitability across the industrial chain.
• Changes in the pace of central-bank gold purchases, shifts in the US-dollar interest-rate environment or a recovery in risk appetite could weaken gold-allocation demand.
• There is uncertainty regarding the pace of implementation of carbon-peaking, production-safety and export-control policies.
• The report includes disclosures of potential conflicts of interest between the research institution and covered companies; investors should make independent judgments in conjunction with other information.

What to watch

• Subsequent monthly changes in China's central-bank gold holdings and the gold-price trend.
• Whether Shanghai copper and Shanghai aluminum inventories continue to decline, and whether price gains can continue.
• Whether industrial-grade and battery-grade lithium hydroxide and lithium carbonate prices stabilize.
• The pace of implementation of China's carbon-peaking action plan in the steel, aluminum, cement and flat-glass industries.
• The impact of Indonesia's FeNi and NPI export controls on the nickel-related supply chain and prices.
• Changes in steel, cement, coal and glass inventories and end-market demand.