CITIC SEC: Copper fundamental narrative returns; copper stocks in Q2 may return to market allocation mainstream.

CITIC SEC released a research report stating that the copper sector has been underperforming due to demand headwinds and liquidity shocks since the beginning of the year. Since the second quarter, the rapid destocking of domestic copper inventories has highlighted a significant rebound in demand, while supply disruptions have intensified, strengthening the fundamental logic of copper. The bank expects copper prices in Q2 2026 to stabilize above $13,000 per ton, and after the previous adjustment, valuations of copper sector stocks are at a relatively low level, enhancing the cost-effectiveness of sector allocation. The bank is optimistic about the sector returning to the market allocation mainstream in Q2 2026. Key points from CITIC SEC are as follows: Concerns about demand combined with liquidity shocks have led to poor performance in the copper sector since the beginning of the year. As of April 14, 2026, the Citic Copper Index had fallen by 0.3% since the beginning of the year, ranking last among sub-sectors of nonferrous metals (Citic Nonferrous Index rose by 12.6%). The bank believes that the main reasons for the weakness of copper stocks are: 1) the sharp rise in copper prices since the end of December 2025 has led to weakened downstream purchases, with SMM data showing that domestic copper inventories exceeded 600,000 tons in March 2026, reaching a five-year high; 2) the liquidity crisis triggered by the Middle East conflict has suppressed copper price performance, causing the maximum drawdown of copper prices in March to reach 13% from the January high. With these factors gradually easing, copper prices have been steadily recovering since April, with LME copper prices exceeding $13,000 per ton as of April 13. Rapid destocking of copper inventories since mid-March demonstrates demand resilience. According to SMM data, as of April 13, 2026, domestic electrolytic copper inventories had dropped to 352,000 tons, with a consecutive decrease of over 10% for the fourth week in a row; a decrease of 294,000 tons from the previous peak, a decrease of 46%, and destocking speed significantly higher than the same period in previous years. The decline in Shanghai Futures Exchange cathode copper inventories approached 40% from the peak, indicating a significant improvement in downstream demand and gradual acceptance of current copper prices by the industry chain. The Yangshan copper premium, an indicator of Chinese copper import intentions, reached $76 per ton on April 14, an increase of $56 per ton from the low point at the end of January. Terminal data from the General Administration of Customs shows that China's cumulative copper wire cable exports from January to February 2026 were 243,500 tons, a year-on-year increase of 35%, indicating that demand in the overseas power sector remains strong. Concerns about weakening demand due to high copper prices are expected to dissipate. Supply disruptions intensifying again, maintaining a tight copper supply situation for the whole year. In April 2026, Ivanhoe Mines released updated production guidance for its Kamoa-Kakula copper mine of 290,000 to 330,000 tons in 2026, a decrease of 90,000 tons from previous guidance; and 380,000 to 420,000 tons in 2027, a decrease of 150,000 tons from previous guidance. Since the outbreak of the Middle East conflict, the uncertainty of copper mine supply has increased, manifested in rising fuel and sulfuric acid prices leading to increased costs and potential concerns about production cuts due to insufficient sulfuric acid supply. The bank had previously forecast a 0.2% increase in global copper mine supply in 2026 to 22.96 million tons, but recent frequent supply disruptions may make this forecast difficult to achieve, and the tight copper supply situation in 2026 is expected to intensify. A return to the narrative of copper fundamentals, with the copper sector poised to return to the mainstream of nonferrous metal allocation. Since 2025, with the narrative of supply disruptions, AI demand, and US hoarding driving prices sharply higher, recent demand headwinds and liquidity shocks have dampened the performance of the sector due to the aforementioned bullish factors. The bank expects copper prices to stabilize above $13,000 per ton in Q2 2026 as domestic demand steadily improves and supply disruption resurfaces. After a decline in the first quarter, Citic's copper sector's predicted PE ratio for 2026 is only 12.8 times (Wind consensus forecast), the lowest among sub-sectors of nonferrous metals, significantly improving the stock allocation cost-effectiveness. Risk factors: Risks of significant decline in copper prices; downstream demand falling below expectations due to high copper prices; risks of copper demand substitution; risks of liquidity shocks triggered by escalation of Middle East conflicts.