China Galaxy Securities has released a research report highlighting the continued resilience of the A-share nonferrous metals industry, with earnings growth maintaining a high trajectory in the second quarter of 2026. The optimism surrounding macro expectations and liquidity at the start of 2026, coupled with intensified competition among major powers for critical strategic metals and ongoing supply chain restructuring, propelled both commodity prices for nonferrous metals and the corresponding A-share sector upward. However, the escalation of the Middle East conflict in March, which drove oil prices higher and stoked inflation, raised concerns about the sustainability of the Federal Reserve's accommodative monetary policy and amplified uncertainty about the future economic outlook, leading to a pullback in metal prices from elevated levels.
Despite this, the prolonged price increases throughout 2025 created a favorable base effect, resulting in a significant year-on-year surge in earnings growth for the A-share nonferrous metals industry in the first half of 2026. The brokerage's key insights include continued improvements in profitability, with the sector's overall Return on Equity (ROE) climbing quarter-on-quarter to a record high.
Where the gains are coming from: The industry's overall ROE rose from 4.76% in Q1 2026 to 5.00% in Q2 2026, a sequential increase of 0.24 percentage points. The primary driver was an improvement in the overall sales margin, which expanded from 8.04% to 8.27%, contributing 0.14 percentage points to the ROE uplift. Additionally, the equity multiplier increased from 2.03 to 2.05, adding 0.05 percentage points, while asset turnover edged up from 0.291 to 0.295, also contributing 0.05 percentage points to the higher ROE. The overall gross margin for the sector hit 18.10% in Q2 2026, up 1.35 percentage points from the prior quarter, which was the main factor behind the improved sales margin.
Cash flow is also on a firmer footing: Operating net cash flow for the industry in Q2 2026 grew by 11.58% year-on-year and surged 23.19% quarter-on-quarter. The ratio of operating cash flow to revenue stood at 7.88%, an increase of 1.05 percentage points from the previous quarter. This marks the second consecutive quarter of year-on-year growth in operating net cash flow since Q4 2025, underscoring the sustained improvement in the cash positions of nonferrous metals companies.
Risks to watch: 1) The pace of domestic macroeconomic recovery may fall short of expectations. 2) The Federal Reserve could tighten monetary policy or implement rate hikes exceeding market forecasts. 3) Nonferrous metal commodity prices might experience significant declines. 4) The Middle East geopolitical conflict could escalate further, with developments surpassing market expectations.
Comments