Chinalco International's net profit in the first quarter increased by 33 times year-on-year, which obviously aroused the outside world's desire to explore the non-ferrous metal sector.
On April 19, Chinalco International (02068, 601608.SH) released its first quarter 2024 performance report. According to the financial report data, the company's operating income during the period was 49.853 billion yuan, an increase of 15.77% year-on-year; net profit attributable to shareholders of listed companies was 104 million yuan, an increase of 3343.56% year-on-year.
As for the reason for the substantial increase in performance, Chinalco International is mainly due to the "internal factors" - during the period, due to the company's focus on new quality productivity, strengthening scientific and technological innovation, accelerating reform and transformation, the gross profit and profit contribution of the engineering survey, design and consulting business segment further increased, and the company's net profit attributable to shareholders of listed companies increased significantly.
As we all know, the non-ferrous metal industry is a typical cyclical industry, the performance of the industry mainly depends on the performance of commodity prices, that is, the strength or weakness of this kind of industry depends on commodity prices, when commodity prices are in an upward cycle, industry companies revenue and profits increase; Conversely, when commodity prices fall, industry companies lose revenue and profits.
Therefore, with the soaring performance of Chinalco International, does it mean that the non-ferrous metal sector will usher in the sixth wave of upward cycle?
Two major factors trigger the "up button"
According to Zhitong Financial APP, non-ferrous metals can be divided into four categories, namely precious metals, industrial metals, energy metals and rare metals. Among them, precious metals are familiar to us such as gold and silver, while industrial metals are more used in the field of industrial production, representative industrial metals are copper and aluminum, energy metals refer to lithium, cobalt, nickel, etc. used in the manufacture of lithium batteries, and rare metals refer to rare earths.
Looking back at the recent rise in non-ferrous metals, it is not difficult to find that it is mainly catalyzed by the rise of precious metals represented by gold and industrial metals represented by copper and aluminum. For example, since the beginning of this year, the spot gold price has risen from 482.74 yuan/gram at the beginning of the year to 561.60 yuan/gram on April 22, and the price of non-ferrous copper has risen from 69,130.00 yuan/ton at the beginning of the year to 80,320.00 yuan/ton on April 22.
(数据来源：choice)
A closer look at the reasons for the rise in precious metals and industrial metals shows that it is mainly due to two reasons, one is the expectation of the Fed cutting interest rates, and the other is the reduction in supply.
On January 31 this year, the Federal Reserve announced that it would keep the target range for the federal funds rate unchanged at 5.25% to 5.5%. This is the fourth consecutive time since September 2023 that the Fed has left this rate range unchanged. As of March, the Fed still gave expectations for three rate cuts, and expected to start cutting rates as early as May.
Generally speaking, the price of gold is usually inversely correlated with US Treasury interest rates, and when interest rates fall, traditional fixed-income investments (such as bonds) offer relatively weak returns, and investors look for non-traditional means of storing wealth such as precious metals, which pushes up their prices. At the same time, lower interest rates weaken the US dollar, making gold cheaper for international buyers, driving buyer demand for gold. Therefore, the Fed's accommodative policy and a weaker dollar are the main drivers of gold prices.
Let's look at another supporting factor – the reduction in supply. In the case of non-ferrous copper supply, since 2014, the low capital expenditure of copper mining companies has determined that the future growth of copper mine production will be limited. On the one hand, the taste of copper ore is declining rapidly, that is, less and less copper can be extracted from the same excavated copper ore. Moreover, the aging of copper mines in the world is very serious, and about half of the copper mines are more than 50 years old, which means that the same weight of copper mines can extract less and less metallic copper.
Factors such as aging mines and declining grades have also clearly constrained the growth of copper concentrate supply. According to ICSG, CRU and Woodmac statistics, the average grade of open-pit copper mines in the world has dropped from 0.81% in 1993 to about 0.6%, and the average grade of underground mines has dropped from 1.36% in 1993 to 1.12%.
In addition to copper, global industrial metals such as aluminum and zinc are also facing the problem of reduced supply. For example, industrial metal zinc, due to high costs, strikes, and production accidents, overseas mines are expected to affect the output of zinc concentrate in 2023 by about 220,000 tons, accounting for about 1.5% of the total output, and the supply contraction will be transmitted downward from the mine end.
In view of the above, it is not difficult to see that the Fed's interest rate cut expectations + supply reduction are the main "trigger buttons" for the rise in non-ferrous metals.
The "wind" of a strong cycle blows to the non-ferrous metal plate?
Reviewing the five strong cyclical markets of non-ferrous metals, it can be seen that the underlying logic of the outbreak of cyclical stocks is actually caused by the catalysis of supply and demand.
The first round of strong cyclical market was mainly in the period from 2006 to 2007. At that time, thanks to the expansion of global demand, China's economy also entered a boom period, China's real estate and infrastructure demand is strong, driving the price of raw materials soaring, coal, nonferrous metals, steel prices have basically increased by 3-4 times. However, the subsequent financial turmoil in 2008 prompted a recession, and the cyclical market peaked in March 08.
The second round of strong cyclical market began at the end of 2008. In response to the financial turmoil, at the end of 2008, the mainland government launched a super stimulus policy of "four trillion yuan", which prompted domestic demand to rebound rapidly in the short term. At the same time, the introduction of policies to stimulate consumption, such as automobiles and household appliances going to the countryside, has further strengthened the demand for upstream resource products, thereby catalyzing a strong cyclical market for non-ferrous metals.
The third round of the strong cycle occurred from July 2010 to early 2011, mainly due to the limited supply side, which drove the valuation of the industry to increase, and the sector rose far less than the previous two rounds of market; The fourth cycle took place in 2016-2017, and the catalyst for the rise was "supply-side reform"; The fifth round of the cycle is in the period from 2020 to 2022, when the Sino-US cycle resonates and recovers, and the recovery of production promotes strong demand for upstream resource products, which also drives the non-ferrous metal industry to usher in an upward market.
As can be seen from the above, the rise in non-ferrous metals is mainly driven by the relationship between supply and demand, that is, the shortage of supply is a strong cycle, and the oversupply is a weak cycle.
However, it should be noted that the upward trend catalyzed by the increase in demand is generally more sustainable and the increase is often larger. The upward market, which is catalyzed by supply-side constraints, tends to be pulsive and less sustainable, usually depending on how long the catalytic factors can last.
Therefore, combined with the above-mentioned strong cycle performance, it can be seen that the fifth round of strong cycle has not continued into 2023. In 2023, the mainland economy will show a weak recovery, the growth rate of some economic indicators will slow down, and the prices of non-ferrous metals will generally weaken. Among them, copper and aluminum prices remained firm, lithium carbonate, industrial silicon, and nickel prices fell sharply, gold maintained a volatile upward trend due to strong investment attributes, and rare earth metal prices showed a downward trend.
This can also be seen from the 2023 performance of major non-ferrous metal companies. Combined with the performance of non-ferrous metal concept stocks in the Hong Kong stock market, 2023 will also be a year of "mixed joys and sorrows" for them.
For example, Shandong Gold (01787), represented by the production of gold and silver mines, showed the same upward trend as gold, with revenue increasing by 17.83% year-on-year to 59.275 billion yuan, and net profit increasing by 114.66% year-on-year to 1.804 billion yuan; Ganfeng Lithium (01772) showed the same decline as lithium carbonate, with revenue falling 20.69% year-on-year to 32.812 billion yuan and net profit falling 75.70% year-on-year to 4.983 billion yuan. Jiangxi Copper (00358), which is dominated by copper mines, has the same trend as strong copper prices, with steady growth in revenue and net profit, which are 520.339 billion yuan (up 8.77% year-on-year) and 6.746 billion yuan (up 12.4% year-on-year), respectively.
(数据来源：choice)
From the above data, it is not difficult to find that the rise in the non-ferrous metal sector brought about by the Fed's interest rate cut and production reduction is not very sustainable. As mentioned above, if the rising market of a strong cycle wants to be sustainable, it is mainly stimulated by the demand side. The non-ferrous metal sector is mainly due to supply constraints, and at the same time, China's demand has not really recovered, and the sustainability of this round of rising market may not be easy to say. In the future, with the clear recovery of domestic demand, it may be the real start of a wave of strong cyclical market. Therefore, for investors, although the short-term rise in the non-ferrous metal sector is eye-catching, the risk of chasing higher is also increasing, and it may be necessary to be cautious.