How should non-ferrous metals be allocated on the path to deleveraging?

　　Deleveraging in the nonferrous metals sector remains ongoing, with high beta characteristics persisting. Macroeconomic expectations and liquidity fluctuations continue to exert significant influence on the sector. We maintain our recommendations for the electrolytic aluminum, lithium resources, and Belt and Road–related segments.

　　I. Pioneering the realization of allocation value

　　Deleveraging in the nonferrous metals sector remains underway, with high beta persisting. As of now, the average asset‑to‑liability ratio among listed companies in the sector that have disclosed their annual reports stands at 40.8%, down 2 percentage points from year‑end 2015. From a balance‑sheet perspective, the nonferrous metals sector continues to exhibit elevated beta, and fluctuations in macroeconomic expectations and credit conditions still exert significant influence on the sector. We believe that listed companies that are deleveraging relatively quickly and maintaining sustained profitability are likely to be among the first to see emerging allocation value.

　　We continue to recommend the electrolytic aluminum sector. Last week, base metal prices showed mixed performance: copper fell 0.8%, while aluminum rose 1.5% and zinc gained 1%. We maintain our view that near-term demand remains solid, while medium- to long-term increases in raw material costs—driven by factors such as ore grades, recoverable reserves, coal, electricity, and alumina—are likely to support higher metal prices. Accordingly, we favor the electrolytic aluminum sector, which stands to benefit most from expectations of supply-side reforms, as well as the copper sector, amid a reversal in concentrate supply and demand. We reiterate our “Add” rating for: Yun Aluminum Co., Ltd. (8.63, +0.23%, Buy), China Aluminum Corporation (4.80, −0.62%, Buy), and Tongling Nonferrous Metals Co., Ltd. (2.82, +0.36%, Buy). Additionally, we highlight stocks poised to benefit, including Luoyang Molybdenum Industry Co., Ltd. (4.25, +0.47%, Buy), Zijin Mining Group Co., Ltd. (3.35, −0.30%, Buy), Jiangxi Copper Company Limited (16.17, +1.83%, Buy), and Yunnan Copper Company Limited (12.71, +1.60%, Buy), among others.

　　II. Analysis of Each Sub-Sector

　　Lithium‑battery raw materials: The upstream segment remains the most demand‑driven and least supply‑elastic. In the first half of the year, lithium concentrate supply and demand stayed tight, with lithium carbonate and lithium hydroxide prices remaining at elevated levels. Demand for tricobalt tetroxide is improving, and cobalt prices are expected to continue rising. Meanwhile, intensified efforts to crack down on illegal activities in the rare‑earth sector, coupled with expectations of state stockpiling, are gradually boosting prices for high‑end permanent magnets.

　　Belt and Road Initiative: We believe that the implementation of the Belt and Road Initiative is expected to substantially advance resource development and capacity‑cooperation between Chinese enterprises and countries along the route.