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Bullish Non-ferrous Resources Value Revaluation

 

 

Recently, the general manager of Changjiang Securities Research Institute and the chief analyst of the metal industry pointed out that this year, under the dual catalysis of "external Federal Reserve interest rate cut cycle + internal economic policy shift," non-ferrous metal commodities and equities have both performed brightly. A long-term perspective is optimistic about the revaluation of the value of non-ferrous resource products.

Data shows that as of October 24, 2024, in terms of commodities, the annual increases of SHFE copper, SHFE aluminum, and SHFE gold were 11.64%, 8.29%, and 29.73%, respectively; in terms of equities, the SWS non-ferrous metal first-level industry index increased by 10.63% year-on-year, ranking 8th among 31 industries.

Related individuals stated that over the past decade, against the backdrop of the reshaping of the global industrial chain, the increase in friction costs and the decrease in production efficiency have led to a significant rise in the central tendency of overseas inflation. During this period, the long-term lack of capital expenditure in overseas mines has suppressed resources, and China's supply-side reforms have suppressed smelting, weakening the supply elasticity of upstream resource products. At the same time, the additional capacity investment brought about by the United States "reindustrialization" and the backup of manufacturing outsourcing has led to manufacturing capacity exceeding demand, further benefiting upstream resources.

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Related individuals believe that from a medium to long-term perspective, the revaluation of the value of non-ferrous resource products is optimistic. On the one hand, there is a high probability that domestic policy will continue to catalyze against the current, and overseas industrial economic data is expected to benefit from interest rate cuts and improve, with favorable macro factors; on the other hand, with the Federal Reserve's interest rate cuts and domestic policy stimulus, the global easing space and economic recovery expectations are expected to open up, combined with the stimulation of emerging demands such as new energy, and the supply is limited due to insufficient capital expenditure in the previous period, the industry's own supply and demand fundamentals are gradually improving.

Base metals: Copper and aluminum are more alpha in the cycle, and the cost-performance ratio is prominent in the medium term.

Related individuals stated that under the dual catalysis of the Federal Reserve's interest rate cuts and the improvement of domestic macroeconomic expectations, the logic of the central upward trend of copper and aluminum commodities remains unchanged. Benefiting from the limited supply elasticity and the prominent growth of demand, copper and aluminum are more alpha in the cycle, and the future commodity price breakthrough to a historical high is the most expected.

From a short-term perspective, copper and aluminum commodities may fluctuate and strengthen. Considering that overseas industrial economic data is expected to benefit from interest rate cuts and improve in the next 1-2 quarters, and there is a high probability that domestic policy will continue to catalyze against the current, it is expected that copper and aluminum commodities will fluctuate and strengthen. In addition, for alumina, which is driven by the supply disturbance of bauxite and pushes up prices, it will remain relatively strong before the increase in ore supply leads to a recovery in spot inventory. Close attention should be paid to the production and production progress of Chinalco Huasheng, Hongqiao Huihong, and the Indonesian Manpawawa project from the fourth quarter of this year to the first quarter of next year to determine the inflection point of alumina price trends.

From a long-term perspective, the supply of copper and aluminum may face a long-term situation of insufficient elasticity and rising mining costs. Against the backdrop of long-term demand growth resilience, this helps to push up the central tendency of commodity prices. For resource products, the law of the past cycle research framework "demand determines direction, supply determines elasticity" has not failed. At the same time, it is important to note that due to the suppression of capital expenditure by low prices in the past decade, the constraints of ESG (environmental/social/governance) and geopolitical risks are continuously increasing, and the natural disadvantage of mineral resource investment is that in the foreseeable future, resource and quasi-resource metal varieties such as copper and aluminum will face a long-term situation of insufficient elasticity and rising mining costs, which will help to push up the central tendency of commodity prices. Furthermore, to break the situation of insufficient supply release in the future, a longer period and a higher amplitude of industrial profits are needed to stimulate some relatively high-cost supplies to play a role.

On the demand side, setting aside the cycle perspective and starting from a longer development process, copper and aluminum, which have consumption structure upgrade demand, have long-term demand growth resilience. On the one hand, under the trend of electrification and lightweight, referring to the experience of developed countries overseas at that time, China, which accounts for nearly half of the global demand, has entered the middle and later stages of industrialization, but the demand for copper and aluminum still has growth; on the other hand, with the advancement of industrialization in emerging developing countries, the global demand for copper and aluminum still has room for further regional acceptance.

Copper and aluminum equities are more optimistic than commodities. Because they not only conform to the current policy shift in the direction of the cycle but also do not rely on strong stimulus policies due to their own good supply and demand pattern, the cost-performance ratio of copper and aluminum equities is the most prominent.

Precious metals: Pay attention to the differentiation between gold and gold stocks, and focus on the elasticity of silver.

Related individuals stated that recently, gold price expectations are more important than reality, and long positions drive gold prices to new highs, while silver prices start to catch up.

Related individuals believe that two points should be emphasized at present: First, the convergence of equities to commodities, as gold prices continue to prove themselves, the equity side is expected to converge quickly, and early style factors and other disturbances will gradually fade away; second, pay attention to the catch-up of silver prices, as interest rate cuts begin, inflation expectations rise, and silver may accelerate to catch up with gold. In the later stage of the precious metals market, the explosive power of silver catch-up is strong, and the elasticity is considerable.

Gold interests are expected to converge towards commodities. Gold prices have continued to be strong recently, with the core clues around interest rate cut expectations as U.S. debt interest rates decline volatility bull. At the same time, A-share gold stocks underperformed relative to commodities amid multiple concerns. Equity to the right side of trading, the essence is still the traditional beta thinking to see cyclical stocks, concerns about short-term volatility, and thus early cash. However, the current round of gold price strength has so far deduced independent alpha logic. Under the de-dollarization trend such as the continued purchase of gold by the central bank, the pivot has risen step by step, although it fluctuates with the real interest rate framework. The gold pricing framework is moving away from pure cyclical fluctuations. Interested parties believe that the equity side should pay attention to the strong industry trend. With the high gold price pivot in the past four years, corporate earnings have continued to improve and the capital expenditure cycle is in full swing. The next two years will be the first year of A-share gold stock production capacity.

Silver may accelerate to catch up with gold. In this round, silver has more advantages compared to 2020: first, lower inventory and better supply and demand structure, which is due to the continuous increase in photovoltaic silver demand under tight supply; second, lower valuation, both the copper-silver ratio and the gold-silver ratio are significantly lower than the last round; third, silver prices are more realistic in responding to market supply and demand. The inventory of US commercial banks represented by JPMorgan has significantly decreased, which will be reflected in their significant reduction in market influence.

Energy metals: Both commodity and equity are at the bottom, focusing on the rebound opportunities under the repair of the basic situation.

The slowdown in the growth rate of new energy demand and the commissioning of new capacity have led to an oversupply trend for energy metals such as lithium, cobalt, nickel, and rare earths. Admittedly, it is not easy to reverse the supply and demand pattern overnight, but it is evident that on the one hand, both new energy vehicles and energy storage still have considerable growth, supporting the prosperous demand of the energy metal industry; on the other hand, under the dual pressure of falling prices and rising rigid production costs, the downward adjustment of profit expectations has significantly slowed down the upstream expansion momentum, and capital expenditure has significantly decreased since 2024. Related individuals stated that therefore, it can be judged that the supply and demand pattern of energy metals has already started to improve. In this process, both commodity prices and corporate profits may be repaired to a certain extent. Combined with the current energy metal sector valuation level, it may have come to the historical bottom range, and the investment cost-performance ratio is gradually emerging.