LatAm Materials: Initiation of Coverage

Initiate the Brazilian Metals & Mining space

In this report, we initiate coverage of the Brazilian Metals & Mining sector. Investing in the space over the last decade has proven to be a challenging task, with significant volatility, which wasn't necessarily met with corresponding returns. The sector has a strong correlation to China's economic momentum (the largest consumer of commodities in the world), so no wonder sentiment around these stocks is one of the most bearish we've seen in years. China's secular decline of its all-important property sector has translated into decelerating economic activity and also demand for metals. Now China also needs to deal with a potential trade war as a second headwind, which should place additional pressure on growth and metals consumption ahead.

China's property decline and new growth model: slower growth to persist

China's policymaking has been one of the key value drivers for basic materials equities over the last several years. Investing in gross capital formation was the base of China's economic engine for nearly two decades, with sectors like property and infrastructure benefitting the most - metals demand boomed during the period. Now, with China shifting away from this old investment-intensive model and into a more consumer/high-tech/green model, the slower growth trajectory should persist ahead. Demand for commodities like steel and iron ore will feel the hit, with significant exposure to the secular downturn of the property sector. Base metals like aluminum and copper also have exposure to the sector, but energy transition trends should be able to offset the shrinking construction market.

Rising trade tensions are negative for industrial metals; How will China respond?

With the US proposing and in fact implementing tariffs on its trading partners, we would expect rising trade tensions, a stronger USD and higher long-term yields to negatively impact metals demand globally. Additionally, the implementation of tariffs, with focus on China, should lead to a slower global economic momentum, and also generate a negative impact on commodities in general. As per UBS China economics team, given the persistent domestic growth headwinds and external/ tariff uncertainties, the government may need to roll out additional policy support later to achieve its ~5% growth target. In our opinion, there is still significant uncertainty on the impact and implementation of tariffs and magnitude of China's (additional) stimulus response in 2025.

On a global level, UBS sees base metals (Cu, Al, Ni) as better positioned vs steel/iron ore/coal - underpinned by compelling supply dynamics and demand supported by energy transition applications. US steels could eventually benefit from the direct or indirect effect of higher tariffs, despite the mixed demand outlook for the region.