CITIC Construction Investment: The Federal Reserve's interest rate cuts stimulate the financial attributes of non-ferrous metals, continuing to write the chapter of the non-ferrous metal bull market with a double boost in EPS and PE

According to the Zhitong Finance APP, CITIC Construction Investment has released a research report stating that the performance of the U.S. economy and employment data has been poor. Coupled with Trump's nomination of Stephen Moore, the chairman of the Economic Advisory Council, to the Federal Reserve Board, this has strengthened market expectations for a rate cut by the Federal Reserve in September, leading to a broad rise in the non-ferrous sector. In addition to the monetary easing brought about by the Federal Reserve being in a rate-cutting cycle, the domestic "anti-involution" initiative is optimizing production factors, enhancing profitability at all levels, and improving market expectations, which is conducive to the upward transmission of metal prices to downstream sectors. Furthermore, the valuation of the industrial metals sector is at a relatively low level, indicating potential for upward correction. A non-ferrous bull market driven by both EPS and PE is beginning.

CITIC Construction Investment's main points are as follows:

Industrial Metals: Last week, the price changes for LME copper, aluminum, lead, zinc, and tin were 1.4%, 1.7%, 1.5%, 3.8%, and 1.2%, respectively. The prices of industrial metals are determined by both "financial attributes" and "commodity attributes." From a financial perspective, the Federal Reserve has entered a rate-cutting cycle; from a commodity perspective, global copper and aluminum inventories are at relatively low levels, and the recovery of the Chinese economy is promising. Coupled with the boost from the new energy sector, the demand for copper and aluminum is expected to improve.

EPS and PE double impact, the non-ferrous bull market is restarting

(1) The Federal Reserve's rate cut stimulates the financial attributes of non-ferrous metals. The U.S. second-quarter GDP annualized quarter-on-quarter initial value was -0.9% (expected +0.5%, previous value +1.3%), marking the first contraction since Q2 2022. The U.S. July non-farm employment data was disappointing, with 150,000 new jobs added in July (expected 180,000, previous value 209,000), and the unemployment rate was 4.0% (previous value 3.9%), reaching a new high for 2023. The contraction in economic and employment data has strengthened expectations for a rate cut by the Federal Reserve in September. Additionally, Trump's nomination of Stephen Moore as a Federal Reserve governor suggests a more dovish stance from the Federal Reserve, with the probability of a rate cut in September rising to 93.6%. The Federal Reserve's rate cut is likely to create a weak dollar, which is beneficial for stimulating the financial attributes of non-ferrous metals. Gold, being the most sensitive non-ferrous commodity to interest rates, has already challenged historical price highs, and the non-ferrous equity sector is beginning to stir, with equities leading ahead of commodities.

(2) "Anti-involution" and supply constraints drive the commodity attributes of non-ferrous metals. Although the domestic anti-involution initiative rarely directly addresses industrial metals, its aim is to optimize the industrial structure, activate production factors, and improve market expectations. The profitability improvement at various downstream levels will facilitate the upward transmission of price increases from upstream metals to downstream sectors. However, there are generally constraints on the supply side of non-ferrous metals: the number of newly discovered copper mines is limited, and insufficient capital expenditure has restricted the growth of refined copper supply during a phase of strong demand for copper due to the global energy revolution; domestic electrolytic aluminum capacity is nearing its "ceiling," and overseas electrolytic aluminum investment progress is constrained by infrastructure and supporting energy, resulting in global electrolytic aluminum supply growth of less than 3%; small metals such as molybdenum, antimony, uranium, and rhenium are facing insufficient investment and resource depletion, failing to meet the increasingly high demand for high-end products. Limited supply, resilient demand, and the ability of downstream sectors to pass on costs will drive non-ferrous prices steadily upward.

(3) The PE level of non-ferrous metals is relatively low, and the double impact of EPS and PE continues to write the chapter of the non-ferrous bull market. The global monetary easing and fiscal stimulus from 2020 to 2021 led to a sharp market cycle; From 2022 to 2024, due to supply constraints, consumption has been supported by high electricity consumption from the grid and new energy sources, allowing industrial metals like copper and aluminum to achieve an annualized increase of 20% despite expectations of interest rate hikes by the Federal Reserve and weakening consumption. Currently, the Federal Reserve's interest rate cuts are optimizing the monetary environment, domestic anti-involution is improving consumption expectations, and emerging economies are injecting new vitality into consumption, while the supply side remains constrained, ensuring clearer upward momentum for industrial product prices. Since the beginning of 2025, the non-ferrous PE has been at a low level, with copper, as a resource product, once approaching a PE of 10 times, and the supply-constrained aluminum PE dropping to 7-8 times, indicating room for PE adjustments. This, combined with upward EPS, constitutes a double boost, jointly continuing the chapter of the non-ferrous bull market