CITIC SEC: The expected gap in copper supply and demand is expected to further materialize, optimistic about the copper sector's investment opportunities.

CITIC SEC released a research report stating that with the delay in the resumption of production at the Indonesian project and a comprehensive downward revision of production guidance for 2026-2027, the production expectations for major global copper mining companies in 2026 have officially entered a decline. The potential impact of extreme weather events in the future may further disrupt supply. The bank expects that the recent unexpected destocking in the country will demonstrate a strong supply-demand logic and the weakening of macro pressure will push copper prices to stabilize at $13,000/ton in the second quarter of 2026, and the price of copper is expected to hit a new high due to lower expectations of supply and demand. The bank sees a good opportunity for copper plate allocation with both profit elasticity and valuation elasticity resonating. Key points from CITIC SEC: Copper supply disruptions reappear, with annual production expectations officially entering a decline. According to media reports, the Indonesian Freeport company plans to resume full production at its giant Grasberg copper mine in early 2028, one year later than originally planned. In response to this news, LME copper prices rose by 1.6% on May 8 and once again exceeded $13,500/ton. Although the full production time previously mentioned by Freeport in November 2025, January 2026, and April 2026 were all by the end of 2027, this time the full production progress is delayed by "less than a year." However, based on the 1Q26 financial reports of global major copper mining companies represented by Freeport recently, the bank can see a significant downward trend in production in both qualitative and quantitative aspects: 1) According to the 1Q26 financial report of Freeport, a safety accident in early September 2025 led to the influx of mud into one work surface (PB1C) of the Indonesian PT-FI project. Deep MLZ and Big Gossan (responsible for 30% of production) resumed production in October 2025, and the remaining Grasberg blocks PB2 and PB3 resumed production in March 2026. PB1S is expected to resume production in mid-2027, and PB1C is expected to resume production by the end of 2027, with a target of 65% of normal operating capacity in the second half of 2026 (85% was expected in January 2026), 80% by mid-2027, and 100% by the end of 2027. The 2026-2027 copper production guidance indicated in Freeport's 1Q26 financial report is 363,400/544,000 tons (the production guidance for 2026-2027 in January 2026 was 454,000/680,000 tons, and the production guidance for 2026 in November 2025 was 501,000 tons). This guidance has been reduced by 91,000/136,000 tons sequentially. At the same time, the 2026-2027 copper sales volume guidance indicated in Freeport's 1Q26 financial report is 1,406,000/1,724,000 tons (the guidance in January 2026 was 1,542,000/1,860,000 tons, and the guidance in November 2025 was 1,565,000/1,860,000 tons), with a sequential reduction of 136,000/136,000 tons. 2) According to the bank's summary of the 1Q26 financial reports of major global copper mining companies, the copper production in 1Q26 of the above companies was 3.33 million tons, a year-on-year -2.9%. The current copper production guidance for 2026 of the above companies is 13.78 million tons, a year-on-year -1.5%. Compared to the 4Q25 report (production guidance of 14.00 million tons, a year-on-year +0.1%), the 3Q25 report (production guidance of 14.16 million tons, a year-on-year +1.5%), and the 2Q25 report (production guidance of 14.76 million tons, a year-on-year +3.9%), there is a continuous decline trend, and the latest expectations indicate that production has officially entered a decline. Considering a global average annual production disruption rate of about 5% (CRU data), the bank may continue to see a series of downgrades in copper production guidance in the following quarters. From a mid-term perspective, in cases of extreme El Nio phenomena in history, major copper-producing countries such as Chile, Peru, etc., which are located in South America, are vulnerable to heavy rains and floods. The bank believes that if this year ultimately evolves into a "big year" for El Nio, extreme weather may become an important variable affecting production disruptions this year. In addition, concerns about sulfur and sulfuric acid supply will also have an impact on copper-producing countries such as the Democratic Republic of the Congo and Chile. Since mid-March, the unexpected destocking of copper inventories has demonstrated the resilience of demand. According to SMM data, as of May 8, 2026, domestic electrolytic copper inventories have dropped to 291,000 tons, a decrease of 355,000 tons from the mid-March peak, a decrease of 55%, which is the fastest destocking period in nearly five years, and the current inventory is lower than the average level in the same period after the Spring Festival in the past five years. The unexpected destocking of inventories is due to supply contraction and demand resilience: 1) On one hand, there is a significant reduction in supply. According to SMM and customs data, the supply of refined copper in China from January to March (production + net import) was flat year-on-year, while the growth rate in the same period last year was 5.1%, reflecting the supply contraction in the context of tight supply at the mining end. SMM predicts that domestic supply from April to June will decrease by 0.5% year-on-year (a growth of 11.7% year-on-year in the same period last year), and the tight supply situation will continue. 2) On the other hand, there is an unexpected resilience in demand. According to SMM data, the apparent demand for refined copper in China from January to March increased by 0.1% year-on-year, and SMM predicts a year-on-year growth of 2.9% from April to June, significantly outperforming the bank's forecast level of +0.8% for domestic demand in 2026 based on terminal data growth rates. The bank believes that the unexpected resilience on the demand side is closely related to the super-expected growth in terminals such as power grids and AI, as well as the unexpected weakening impact of price increases. With a solid fundamental foundation and a weakening of macro pressures, the copper sector is expected to return to the mainstream of non-ferrous metal allocation. Since 2025, copper prices have risen significantly under narratives of supply disruptions, AI demand, and US stockpiling. Since March, macro disturbances have dampened the sector's performance due to the fading of the above bullish factors. As of the close on May 8, 2026, the cumulative increase in the CITIC copper index since the beginning of the year was only 2.9%, lagging behind the CITIC non-ferrous metals index by 15.2 percentage points and the Shanghai and Shenzhen 300 index by 2.3 percentage points. Compared to the weakening of profit expectations, the compression on the valuation side is more significant. As of the close on May 8, the bank expects the 2026 forecast price-earnings ratio for the copper sector (assuming a copper price of $13,000/ton) to be only 11.4 times. The bank believes that based on a solid supply-demand logic, foreseeable low inventory levels, and a weakening of macro pressures, copper prices in the second quarter of 2026 are expected to stabilize at $13,000/ton. Coupled with further realization of the divergence in supply and demand expectations, copper prices are expected to hit new highs. Based on the overlap of profit elasticity and valuation elasticity, the current allocation value of the copper sector is becoming more prominent. Risk factors: Significant decline in copper prices; downstream demand falling below expectations; risks of continuous price increases in sulfuric acid, diesel, etc., leading to lower-than-expected supply or significantly higher costs; liquidity shocks caused by escalation of conflicts in the Middle East; supply risks due to extreme weather.