To The Moon

Over the past two years, the stories of both A-shares and Hong Kong stocks have revolved around one key phrase: pro-cyclical. Especially in commodities and resource-related equities, this phrase acts like a switch—once triggered by policy or the economic cycle, the market tends to surge swiftly and fiercely. Recently, market attention has again shifted to China’s resource sectors: steel, copper & aluminum, and rare earths, all riding on policy stimulus and a global price rebound.

But why should we care about these “iron lumps” and “piles of ore”? Because they are not just cold raw materials—they represent China’s confidence in breaking free from economic “involution.” Steel fuels infrastructure, copper & aluminum are the “lifeblood” of new energy vehicles, and rare earths are the “vitamins” for semiconductors and wind power. Behind them lie the very core directions of China’s future industrial upgrading.

I. The Pro-Cyclical Logic: Why Have Resource Stocks Become the “Hotspot”?

Put simply, pro-cyclical means “when the economy improves, they do even better.” As GDP and PMI indicators strengthen, demand from infrastructure, manufacturing, and exports flows directly into upstream raw materials, making steel, copper & aluminum, and rare earths the first beneficiaries.

According to Huafu Securities, in July 2025 China’s industrial value-added grew 5.7% YoY, maintaining several months of recovery. At the same time, upstream raw material output shrank due to environmental and capacity-reduction policies, creating a “shrinking supply, stable prices” pattern. This combination—tight supply and recovering demand—often leads to price rebounds beyond expectations.

The beauty of pro-cyclical stocks lies in their amplification effect. In downturns, resource stocks can collapse; but once the economy rebounds, they spring back like a coiled spring, sometimes even outperforming growth stocks.

For example: after the 2020 pandemic, China ramped up infrastructure spending. Steel demand surged, driving the steel index up more than 80% within half a year. At that time, steel ETFs became “cash machines” in the eyes of investors, delivering months of returns that exceeded many people’s annual targets.

Similar stories have unfolded in copper and rare earths. Copper, known as the “economic barometer,” tends to rally whenever global PMI improves. Rare earths, driven by new energy and defense industries, often ignite market sentiment the moment policies are announced.

So the pro-cyclical logic is not complex: Economic data recovery → Downstream demand rebound → Upstream supply-demand improvement → ETF price swings. For investors, catching this rhythm is the key to “eating meat” when the wind blows in your favor.

II. ETF Panorama: Steel, Copper & Aluminum, Rare Earths—None to Be Missed

The greatest strength of resource ETFs is convenience. You don’t need to pick individual stocks or worry about which leader gets dragged down by cycles. ETFs let you “buy a basket of mines” in one go, covering the whole industry.

1. Steel ETFs: High-Beta Cyclical Players

Steel’s logic is straightforward: once the state boosts infrastructure or real estate stabilizes, steel demand spikes. Steel ETFs usually track the CSI Steel Index, with constituents like Baosteel, Ansteel, and Hebei Iron & Steel.

• Features: Extremely elastic—soaring in rallies, painful in downturns.

• For whom: Investors sensitive to macro policy, willing to trade in waves.

2. Copper & Aluminum ETFs: The “Barometer” of New Energy

Copper is called the “economic barometer,” with prices moving in sync with PMI. New energy vehicles, power grid investment, and solar storage all rely heavily on copper and aluminum. These ETFs usually hold Jiangxi Copper, Chalco, Yunnan Copper, etc.

• Features: Tied closely to the new energy supply chain; influenced by both macroeconomics and industry policy.

• For whom: Medium-to-long-term investors bullish on new energy and electricity investment.

3. Rare Earth ETFs: Policy-Driven “Strategic Resources”

Rare earths, the “vitamins of industry,” are key to EV motors, wind turbines, defense, and semiconductors. Rare earth ETFs typically include Northern Rare Earth, China Rare Earth, Minmetals Rare Earth, etc.

• Features: Policy-sensitive with sharp rallies and steep pullbacks; highly volatile.

• For whom: Risk-tolerant investors seeking policy-driven opportunities.

III. Policy Tailwinds: Drivers of “Anti-Involution” and Capacity Cuts

China’s resource sectors are inseparable from policy. Why? For over a decade, industries like steel and metals have suffered from overcapacity. Companies fought for market share by slashing prices, leading to collective losses—classic “involution”: the harder they worked, the worse the outcomes.

This is why policy matters so much. A single capacity-cut directive can reshape the entire industry. For example, in July 2025, upstream raw material output fell not because demand collapsed, but because the state began enforcing “anti-involution” measures, deliberately reducing output. This signals an end to reckless expansion and price wars, with industries moving back toward value-driven competition where leaders can regain dominance.

In essence, policy is not just paperwork—it redistributes pricing power. For investors, every policy shift reshapes supply-demand dynamics. Steel, copper & aluminum, and rare earths aren’t just about “is there demand?” but also “does the state want it?”

Thus, understanding resource ETFs requires following this policy thread. Pro-cyclical swings act as the accelerator, while policy is the ignition. When the two combine, markets can shift from “slow simmer” to “raging boil.”

IV. Valuation & Trading: When to Get In?

Resource ETFs are characterized by low valuations and high volatility. Unlike tech stocks trading at 100x PE, these sectors often sit at PB multiples just above 1, sometimes even below book value. Cheap valuations mean that once the cycle turns, the rebound elasticity is huge.

For instance, Huaxi Securities notes the steel sector’s current PB is only ~1.1x, near decade lows. Against this backdrop, just one catalyst—policy support, downstream demand recovery, or rising global commodity prices—could unleash a sharp rally.

How should investors play it?

1. Think in waves Resource ETFs aren’t for long-term “buy-and-hold.” Given their cyclical swings, the right approach is wave trading: buy at undervaluation, cash out on rallies. “Quick in, quick out, don’t get attached.”

2. Follow the data Macro indicators are the best early signals:

   1. PMI rebound → Manufacturing expands → Higher copper/aluminum demand

   2. PPI bottoms → Industrial product prices may rebound → Steel/coal move first

   3. USD rate-cut expectations → Commodities benefit broadly, rare earths and copper often lead

3. Discipline with stops Resource swings are rollercoasters: euphoric on the way up, brutal on the way down. New investors especially need discipline:

   1. Take profit: Trim at +10–15%, exit fully at +20%

   2. Cut loss: Exit decisively around –8% to avoid deeper traps

Key Takeaway Table

In summary: Resource ETFs are not “set-and-forget.” They are low-valuation, high-volatility tools that shine in cyclical upswings and policy windows. With the right timing, they can deliver outsized returns—but only for those who respect the rhythm of the cycle and the rules of discipline.

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