Morgan J.P. recently released a research report outlining its outlook for the performance of China's basic materials sector in 2026. The firm noted that, driven by supply dynamics, the MSCI China Materials Index outperformed the MSCI China Index by 65 percentage points in 2025. It is projected that, fueled by supply disruptions/tightness and further merger and acquisition activities, the MSCI China Materials Index will continue to outperform the MSCI China Index in 2026 (having already outperformed by 3 percentage points in the first week of January). The firm stated that it maintains an "Overweight" rating on CHINAHONGQIAO (01378), raising its target price from HK$34 to HK$40, citing the company's integrated business model as instrumental in preserving its cost advantage relative to competitors; it also raised its earnings forecast for the stock by 5%.

The report provided several key pieces of information, including: 1) Progress in industry consolidation: China Molybdenum's (03993) acquisition of Brazilian gold assets, Jiangxi Copper's (00358) acquisition of SolGold, and China Shenhua Energy (01088) offering more details regarding its previously announced acquisition of assets from its parent company. 2) Ongoing supply disruptions: South32 is scheduled to perform maintenance at its Mozal aluminum smelter in March 2026, and a strike at the Mantoverde copper-gold mine in Chile, owned by Canadian miner Capstone Copper, is expected to reduce copper supply by 77,000 tonnes. 3) Zijin Mining Group (02899) issued a positive profit alert, forecasting a 2025 net profit of 51-52 billion yuan (representing a year-on-year increase of 59-62%). 4) Regarding lithium, the Jiajika mine released its initial environmental impact assessment, with a restart expected to be delayed due to regulatory uncertainty.

The firm also provided a preview of the Q4 2025 performance for relevant companies. After adjustments based on Q4 2025 commodity market prices, it is anticipated that steel companies will report the weakest sequential performance, with earnings for Angang Steel (00347) and Baoshan Iron & Steel (600019) expected to decline by 86% and 33%, respectively. As policy effects wane and demand remains moderate, earnings for coal producers are likely to be flat or show a slight decline. Benefiting from robust growth in the last quarter, Zijin Mining has already issued a positive profit alert, and China Molybdenum also appears to have met the threshold for issuing one. For Ganfeng Lithium (01772) and Tianqi Lithium (09696), following a return to profitability in Q3, Q4 performance is expected to stabilize, with an upward earnings trend anticipated for 2026.

JPMorgan indicated that its order of preference for China's basic materials sector in 2026 is as follows: copper/gold, aluminum, lithium, coal, steel. The firm's commodity research forecasts suggest that demand growth for China's base metals will slow and stabilize, with projected year-on-year demand growth rates for copper and aluminum at 2.5% and 1.5%, respectively. Strong energy storage demand will continue to tighten the lithium market, although more supply additions are expected in the second half of the year as current prices exceed incentive levels.

Regarding individual stocks, JPMorgan stated that Zijin Mining remains its top pick for 2026 due to its exposure to the copper/gold business. Based on its positive view on copper, the firm upgraded Jiangxi Copper's H-share rating to "Neutral," although the stock's recent surge of over 40% appears to have largely priced in the impact of the SolGold acquisition. Meanwhile, the linkage effect between aluminum and copper prices should be favorable for CHINAHONGQIAO and Aluminum Corporation of China (02600). JPMorgan maintains its "Overweight" rating on CHINAHONGQIAO, raising the target price from HK$34 to HK$40, and reiterates its "Overweight" rating on Aluminum Corporation of China with a target price of HK$16. Furthermore, given the potential for declining steel margins, JPMorgan downgraded Baoshan Iron & Steel to "Neutral" and downgraded Angang Steel to "Underweight." The firm also advises investors to buy China Molybdenum on dips.