China Basic Materials 2025 outlook_ A better year ahead, upgrade Conch-H_Chalco-H to BUY, maintain Buy (on CL) on Zijin, downgrade coal to sell

Summary of Goldman Sachs China Basic Materials 2025 Outlook Industry Overview - The report focuses on the outlook for the China Basic Materials sector in 2025, indicating a more favorable year compared to 2024 due to stabilizing domestic demand and supply discipline leading to improved pricing and margins [1][2]. Key Companies and Ratings - Cement: Upgraded Conch-H and CNBM to Buy from Neutral, with expected unit gross profit of Rmb88-90/t for Conch in 2025-26E, up from Rmb58/t in 2024E [12][13][81]. - Coal: Downgraded Chinacoal-H/A and Shenhua-A from Neutral to Sell, with expectations of a long-term correction in coal demand due to China's energy transition [12][13][92]. - Aluminum: Upgraded Chalco-H to Buy from Sell, with a revised price target reflecting improved pricing for alumina and bauxite [12][13][81]. - Copper: Maintained a positive outlook, expecting a 3.0% increase in demand in 2025E [12][13][124]. Demand Projections - Overall demand for China commodities is expected to grow between -3.5% to +3.0% in 2025, a significant improvement from -10.2% to +4.4% in 2024 [2][15]. - Key drivers for demand include infrastructure construction, property completion, and solar installation, with infrastructure expected to stabilize after a decline in 2024 [28][29]. Supply-Side Dynamics - Significant overcapacity exists in cement and steel, with estimates suggesting that 900 million tonnes of clinker capacity (40% of total) and nearly 400 million tonnes of steel capacity (30% of total) need to be removed to restore supply-demand balance [3][58][67]. - Current capacity utilization rates are 51% for cement and 72% for steel, with potential improvements expected through categorized management and enforcement of capacity exits [58][66]. Pricing and Margins - Cement prices are projected to recover, with gross profit margins expected to improve significantly in 2025 due to better capacity utilization and demand stabilization [12][13][81]. - Coal prices are expected to decline slightly, with thermal coal prices projected to average Rmb850/t in 2025, down from Rmb855/t in 2024 [12][13][95]. - Aluminum prices are expected to remain under pressure due to lower fabrication exports, with a forecasted average price of US$1.07/lb in 2025 [12][13][123]. Risks and Considerations - Risks include weaker-than-expected demand in construction and infrastructure, slower-than-expected capacity exits, and potential increases in raw material costs [12][13][169][171]. - The transition to renewable energy sources poses a long-term risk to coal demand, with expectations of a decline in thermal coal demand for power generation by 5-22% by 2030E [2][92]. Conclusion - The outlook for the China Basic Materials sector in 2025 is cautiously optimistic, with expected improvements in demand and pricing for cement and aluminum, while coal faces long-term challenges due to energy transition policies. The report emphasizes the importance of supply-side reforms and the need for capacity management to enhance profitability across the sector [1][12][13][92].