China Securities Co., Ltd. released a research report stating that the U.S. non-farm employment data, the most critical indicator before the Federal Reserve's interest rate meeting, performed significantly below expectations. There is virtually no suspense that the September 16-17 interest rate meeting will announce a rate cut, with the probability of three rate cuts within the year approaching 80%. The U.S. Dollar Index has weakened noticeably, stimulating gold's monetary attributes and copper's financial properties. Gold prices continue to hit new highs, opening up upside space for equity targets. On one hand, low interest rates stimulate prices; on the other hand, metals' strategic positioning enhances valuations. All sub-sectors of non-ferrous metals are flourishing comprehensively. The double impact of price-driven EPS and improved sentiment along with enhanced strategic positioning driving PE multiples is underway. Active participation is recommended.
China Securities Co., Ltd.'s main viewpoints are as follows:
Industry Dynamic Information
Industrial Metals: This week, LME copper, aluminum, lead, zinc, and tin price changes were -0.05%, -0.6%, -0.3%, 1.5%, and -2.0% respectively. Industrial metal prices are determined jointly by "financial attributes" and "commodity attributes." From the financial attribute perspective, the Federal Reserve has already started the rate-cutting cycle. From the commodity attribute perspective, global copper and aluminum inventories are both at relatively low levels, China's economic recovery is anticipated, and coupled with the pull from the new energy industry, copper and aluminum demand growth will improve.
Non-farm Data Strengthens Rate Cut Expectations, Non-ferrous Bull Market Continues
Gold: August Non-farm Sets Tone for September Rate Cut, Gold Prices Continuously Hit Historical Highs
The U.S. added 142,000 non-farm jobs in August, below the expected 164,000 and previous value of 179,000, with the previous two months' data collectively revised down by 86,000. The unemployment rate was 4.3%, slightly higher than the previous 4.2%, marking the highest level since November 2021. After the non-farm release, the probability of a September rate cut implied by rate monitoring tools maintained 100%, with the number of rate cuts within the year rising from 2.4 to 2.8 times, meaning approximately 80% probability of three consecutive rate cuts in September, November, and December. With strengthened rate cut expectations, the U.S. Dollar Index declined, further stimulating gold's monetary attributes. Gold prices continuously hit historical highs, opening up space toward $2,700 per ounce.
Major targets in the gold sector are generally priced at around 20 times PE based on $2,088 per ounce gold price. As upside space for gold prices opens up, gold targets also gain upward elasticity.
Copper: Repeated Attempts to Break Through $4.50 per pound
Short-term consumption is gradually emerging from the off-season. Global exchange inventories stand at 620,000 tons, but distribution is uneven. COMEX copper inventories continue to increase to 300,000 tons, while non-U.S. inventories are at relatively low levels. Copper fundamentals remain healthy. As a USD-denominated variety where financial attribute pricing dominates, Federal Reserve rate cuts are expected to help copper prices cross the $4.50 per pound integer threshold.
From a long-term perspective, green energy transition, electrification, and artificial intelligence boost copper demand, but copper supply faces challenges from insufficient investment and production disruptions at existing copper mines, highlighting scarce resource attributes. Copper mine resources are scarce, rate cuts provide upward momentum for copper prices, equity target valuations are relatively low, and investment returns for equity targets are promising. Continued allocation is recommended.
Current copper sector targets are priced at Q2 average of $4.33 per pound, corresponding to approximately 13 times PE. Compared to historical 15-20 times PE, there is obvious room for improvement. As prices stand above $4.50, the double impact of EPS and PE will drive considerable space for copper equity targets.
Aluminum: Alumina Weakens, Electrolytic Aluminum Profit Margins Expand
The latest domestic electrolytic aluminum market inventory is 628,000 tons, an increase of 6,000 tons compared to the previous period. Downstream sectors are gradually emerging from the off-season, the inventory inflection point is approaching, and inventories are at low levels for the same historical period. Electrolytic aluminum consumption growth has slowed in the second half of the year, but supply growth is also declining, maintaining tight supply-demand balance, allowing industry profits to remain at high levels.
Alumina operating rates have increased, inventories continue to rise, and spot prices have weakened to 3,162 yuan per ton. The latest profitability of the electrolytic aluminum industry shows self-generated power profit of 5,320 yuan per ton including tax, and grid power profit of 3,860 yuan per ton including tax. Domestic electrolytic aluminum capacity has approached the ceiling, while overseas new supply additions require time. During these years, electrolytic aluminum companies' dividend capacity and willingness have both improved, strengthening this sector's dividend attributes. Allocation around high dividend themes is recommended.