CITIC SEC released a research report stating that as Freeport-McMoRan once again delayed the resumption progress of its Indonesian project and comprehensively lowered its production guidance for 2026-2027, the 2026 production expectations of major global copper mining companies have officially turned downward. Furthermore, potential impacts from subsequent extreme weather could lead to an expansion of supply disruptions. The firm expects that the solid supply-demand logic demonstrated by the recent stronger-than-expected inventory drawdown in China, coupled with a weakening of macroeconomic headwinds, will support copper prices to stabilize above $13,000 per tonne in Q2 2026. Driven by the supply-demand expectation gap, copper prices are expected to challenge previous highs. The firm is optimistic about the allocation opportunities in the copper sector, where profit elasticity and valuation elasticity are expected to resonate. The main views of CITIC SEC are as follows:

Copper mine supply disruptions have re-emerged, with annual production expectations officially turning downward. According to media reports, PT Freeport Indonesia plans to restore its giant Grasberg copper mine to full production by early 2028, a one-year delay from the original schedule. Influenced by this news, LME copper prices closed up 1.6% on May 8, breaking through $13,500 per ton again. Although Freeport had previously mentioned full production targets for the end of 2027 in November 2025, January 2026, and April 2026, and the latest reported delay is "less than a year," based on the Q1 2026 financial reports recently disclosed by major global copper miners, represented by Freeport, the firm observes a significant downward revision trend in production from both qualitative and quantitative perspectives: 1) According to Freeport's Q1 2026 report, a safety incident in early September 2025 caused mudflow into a working face (PB1C) of the PT-FI project in Indonesia. Deep MLZ and Big Gossan (accounting for 30% of capacity) resumed production in October 2025. The rest pertains to the Grasberg block: PB2 and PB3 resumed in March 2026; PB1S is expected to resume in mid-2027; PB1C is expected by the end of 2027. The target is to restore operations to 65% of normal capacity in H2 2026 (compared to an estimate of 85% in January 2026), to 80% by mid-2027, and to 100% by end-2027. Freeport's Q1 2026 report shows PT-FI copper production guidance for 2026-2027 at 363,000 / 544,000 tonnes (compared to guidance of 454,000 / 680,000 tonnes for 2026-2027 in January 2026, and 501,000 tonnes for 2026 in November 2025). This represents a sequential downward revision of 91,000 / 136,000 tonnes. Simultaneously, Freeport's Q1 2026 report shows copper sales guidance for 2026-2027 at 1.406 million / 1.724 million tonnes (compared to guidance of 1.542 million / 1.860 million tonnes in January 2026, and 1.565 million / 1.860 million tonnes in November 2025). This represents a sequential downward revision of 136,000 / 136,000 tonnes. 2) Based on the firm's compilation of Q1 2026 reports from major global copper miners, their combined Q1 2026 copper production was 3.33 million tonnes, down 2.9% year-on-year. Their current 2026 copper production guidance stands at 13.78 million tonnes, down 1.5% year-on-year. Compared to Q4 2025 reports (guidance of 14.00 million tonnes, up 0.1% year-on-year), Q3 2025 reports (guidance of 14.16 million tonnes, up 1.5% year-on-year), and Q2 2025 reports (guidance of 14.76 million tonnes, up 3.9% year-on-year), this shows a consecutive declining trend, with the latest expectations indicating production has officially entered a downturn. Considering the global annual copper mine production disruption rate is approximately 5% (CRU data), the firm expects to continue seeing frequent downward revisions to global copper mine production guidance in the coming quarters. From a meso perspective, referencing historical periods of extreme El Niño phenomena, major global copper-producing countries like Chile and Peru in South America are prone to impacts from heavy rains and floods. The firm believes that if this year ultimately develops into a strong El Niño year, extreme weather could become a significant variable affecting production disruptions this year. Additionally, concerns over sulfur and sulfuric acid supply impacts on copper-producing countries like the Democratic Republic of Congo and Chile are unlikely to subside easily.

The stronger-than-expected copper inventory drawdown since mid-March demonstrates demand resilience. According to SMM data, as of May 8, 2026, social inventories of electrolytic copper in China fell to 291,000 tonnes, a decrease of 355,000 tonnes from the mid-March high, a drop of 55%. The timing of the inventory drawdown and its pace are the fastest in the past five years, and current inventory levels are below the average for the same period after the Spring Festival holiday over the past five years. The stronger-than-expected inventory drawdown is attributed to supply contraction and demand resilience: 1) On one hand, there has been a significant supply contraction. According to SMM and General Administration of Customs data, China's refined copper supply (production + net imports) was flat year-on-year for January-March, compared to a 5.1% growth rate in the same period last year, reflecting supply contraction against a backdrop of tight ore supply. SMM forecasts a 0.5% year-on-year decline in domestic supply for April-June (compared to an 11.7% year-on-year increase in the same period last year), indicating the tight supply situation will persist. 2) On the other hand, there has been stronger-than-expected demand resilience. According to SMM data, China's apparent refined copper demand grew 0.1% year-on-year for January-March, and SMM forecasts 2.9% year-on-year growth for April-June, significantly better than the firm's forecast for 2026 domestic demand growth based on end-user data (+0.8%). The firm attributes this stronger-than-expected demand resilience to stronger-than-anticipated growth in end-user sectors like power grids and AI, coupled with a weaker-than-expected inhibitory effect from price increases.

With a solid fundamental foundation and weakening macroeconomic headwinds, the copper sector is expected to return as a main theme for non-ferrous metals allocation. Since 2025, copper prices have surged significantly driven by narratives around supply disruptions, AI demand, and U.S. stockpiling. Macroeconomic disturbances since March have overshadowed these positive factors, leading to subdued sector performance. As of the close on May 8, 2026, the CITIC Copper Index has gained only 2.9% year-to-date, underperforming the CITIC Nonferrous Metals Index by 15.2 percentage points and the CSI 300 Index by 2.3 percentage points. Compared to the weakening of profit expectations, the compression in valuation has been more pronounced. As of the close on May 8, 2026, the firm estimates the forward P/E ratio for the copper sector for 2026 (assuming a copper price of $13,000/tonne) is only 11.4x. The firm believes that based on solid supply-demand logic, foreseeable low inventory levels, and weakening macroeconomic headwinds, copper prices are expected to stabilize above $13,000 per tonne in Q2 2026. Coupled with the further materialization of the supply-demand expectation gap, copper prices are expected to challenge previous highs subsequently. Based on the叠加 of profit elasticity and valuation elasticity, the cost-effectiveness of allocating to the copper sector is becoming increasingly prominent.

Risk factors: Risk of a sharp decline in copper prices; Downstream demand falling short of expectations; Risk of supply falling short of expectations or costs rising significantly due to sustained price increases for sulfuric acid, diesel, etc.; Liquidity shock risk from escalating Middle East conflicts; Supply risks arising from extreme weather.