China's Industrial Profit Rebound and Base Metal Dynamics: Navigating Policy, Deflation, and Global Trade Shifts

China's industrial sector in Q2 2025 has painted a paradoxical picture: a modest profit rebound in high-tech industries amid persistent deflation and overcapacity in traditional sectors. This duality is reshaping demand for base metals like copper and aluminum, creating a complex landscape for investors. The interplay between policy-driven consumption, structural deflation, and global trade shifts—particularly U.S. tariff uncertainties—demands a nuanced analysis of near-term risks and opportunities in the base metals sector.

Industrial Weakness and Policy Stimulus: A Tug-of-War

China's industrial profits fell by 1.7% year-to-date through July 2025, driven by deflationary pressures, overcapacity in steel and coal, and a stagnant housing market. However, targeted policy stimulus—such as the “Trade-in for New” appliance subsidy and infrastructure spending—has propped up demand in sectors like power grids and new energy vehicles (NEVs). For instance, NEV production surged 48.5% year-over-year in Q1 2025, with copper-intensive EV batteries and charging infrastructure driving metal consumption.

Yet, these gains are fragile. The housing market, a traditional driver of copper demand via construction and HVAC, remains in freefall. Housing completions are projected to decline by 15–20% in H2 2025, directly curbing demand for copper in air conditioning and white goods. Similarly, solar installations—another copper-intensive sector—are expected to drop sharply due to regulatory crackdowns on overcapacity in the solar industry.

Copper: A Tale of Front-Loaded Demand and Tariff-Driven Dislocation

China's apparent copper demand in Q2 2025 grew 10% year-over-year, fueled by front-loaded purchases ahead of the 50% U.S. copper tariff announced in August 2025. This surge, however, has created a dislocated global inventory, with visible copper stocks at multi-year lows. The tariff's implementation has triggered a destocking cycle in the U.S., redirecting supply to Asia and emerging markets.

While this shift temporarily eases global copper supply pressures, it introduces new risks. Chinese demand is expected to slow in H2 2025 as the front-loading effect unwinds and housing-related demand weakens. Meanwhile, the U.S. destocking cycle could persist for months, creating volatility in LME prices. J.P. Morgan forecasts LME copper to dip to $9,100/tonne in Q3 2025 before stabilizing at $9,350/tonne in Q4, reflecting a tug-of-war between structural demand (e.g., power grid upgrades) and cyclical headwinds.

Investors must weigh near-term oversupply risks against long-term tailwinds. Power grid investment in China grew 14.6% year-over-year in early 2025, and EV adoption is accelerating. However, the 60% probability of a U.S. recession in 2025 and potential delays in U.S.-China trade truces could amplify price swings.

Aluminum: Structural Constraints and New Energy Tailwinds

Aluminum markets are being shaped by tighter supply fundamentals. Chinese production is nearing regulatory caps, while Guinea's bauxite supply risks—driven by government reclamation of mining rights—threaten raw material security. European and Indonesian expansions are also constrained by power shortages, creating a structural supply bottleneck.

Demand, however, is being driven by electrification and infrastructure. Aluminum's lightweight properties make it critical for NEVs, solar panels, and 5G infrastructure. Despite real estate headwinds, policy support for green energy and urbanization projects is stabilizing demand. For example, China's aluminum consumption in solar panel manufacturing rose 12% year-over-year in Q2 2025.

Yet, risks persist. Chinese producers could expand capacity if bauxite costs fall, while political instability in Guinea could disrupt supply. Investors should monitor Guinea's mining policies and China's smelting output closely.

Investment Implications: Hedging Against Divergence

The base metals sector is bifurcating. Copper and aluminum producers with exposure to high-tech and green energy sectors—such as CATL for EV batteries or Tongwei Co. for solar—offer resilience amid industrial weakness. Conversely, traditional smelters and miners in overcapacity-prone sectors (e.g., steel, coal) face margin compression and valuation risks.

For copper, the key is to balance near-term oversupply concerns with long-term demand from electrification. Overweighting companies with strong EBITDA margins and low-cost production (e.g., those with access to renewable energy) could mitigate volatility. For aluminum, structural supply constraints and new energy demand provide a stronger near-term outlook, but investors should hedge against geopolitical risks in Guinea and regulatory shifts in China.

Conclusion: A Market in Transition

China's industrial profit decline is slowing, but the path to recovery remains uneven. Policy stimulus is propping up demand in high-tech and green energy sectors, while deflation and overcapacity weigh on traditional industries. For base metals, the interplay of U.S. tariffs, global trade shifts, and structural supply constraints will define near-term fundamentals. Investors who navigate this divergence—favoring innovation-driven sectors while hedging against cyclical risks—stand to benefit from the evolving industrial landscape.