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We spent two weeks in China, travelling the cities of Beijing, Shanghai, and Suzhou, as well as the Anhui province. The intent was to gauge on-ground insights on the demand front as well as developments on supply of metals. Our broad takeaways are that China’s domestic economy is doing well, internals are in shape, and economic momentum is solid. China is transitioning toward an advanced economy which is highly aluminium-/copper-intensive. Consumer sentiment appears to be improving. On tariffs, the people sounded better prepared vs the first trade war back in 2018. Our sense is that there is no margin of error when competing with Chinese manufacturing efficiency.

The Good

Our on-ground checks indicate favorable economic momentum with meaningful ongoing developments in new energy vehicles (EV), construction, infrastructure, and technology. 1) Construction activity: We note there is meaningful construction activity especially with some ‘emerging tier 1’ cities developing rapidly with rising manufacturing capabilities through economic zones. We also saw undeveloped areas within city limits of Beijing that are being taken up for development. 2) EV value chain: EVs are a new fad in China. There is a whole set of long value chains for EVs supporting such growth with strong policy push. 3) Consumption: The Chinese government has taken various measures to stimulate consumption – one that has seen success is consumer goods trade-in which is improving consumer sentiment. Implications on metals demand: As the economy transitions from basic to technology-driven growth, demand for aluminium and copper is growing – this was the consensus belief in all our discussions.

The Bad

1) Aging demographics: We visited public parks, subway stations, shopping malls – there are relatively lesser children than in Mumbai, albeit a higher number than in Tokyo. Also, we had discussions with a few 25-year-olds on their perspective of marriage (not enough to make a sample, though); the answer is not encouraging owing to rising cost of living, reduced availability of time, and improving girl-child education. 2) Peak steel: Travelling in China felt much like travelling in any developed country which means that a large portion of what needed to be built has been built and this translates into reduced steel consumption intensity ahead. Nevertheless, steel consumption remains healthy in absolute terms, but is expected to decline at 2% pa.

The Achilles’ Heel

Tariffs have potential to play spoilsport in the otherwise positive economic momentum we observed. We note that metals tend to be the first to react to external shocks which hence poses a downside bias, should existing tariffs not be reversed. Nevertheless, sentiment was largely firm, with the tariff threat undaunting so far.

India Metals & Mining – Equity implications

We came back with a positive overall read for Gravita and aluminium producers, neutral for steelmakers, negative for iron ore miners. Favored picks: VEDL, TATA, NACL, GRAV.

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