What China's Industrial Profit Recovery Means for ASX Resources

The Data and What It Signals

China's National Bureau of Statistics reported strong industrial profit growth for March 2026 and for the first quarter overall. For Australian investors, this data matters because China remains the dominant consumer of the bulk commodities that underpin a significant portion of ASX-listed resources companies. Iron ore, coking coal, and manganese, the primary inputs into steelmaking, are directly connected to the health of Chinese industrial activity.

The profit recovery is not uniformly positive across all commodity categories. It reflects conditions specific to heavy industry and manufacturing, which have different demand profiles to sectors still constrained by weakness in Chinese property construction. Reading the data at a headline level and applying it uniformly across resources is an analytical error that leads to poor position selection.

The relevant question is not whether China's industrial sector is recovering. The data suggests it is, at least partially. The relevant question is which commodities are most directly exposed to that recovery, and which face structural headwinds that the headline figure obscures.

Where the Benefit Is Most Direct: Bulk Industrial Metals

"This will benefit bulk industrial metals such as iron ore, coking coal, and other steel-linked metals such as manganese," says Emanuel.

The clearest beneficiaries of a Chinese industrial profit recovery are the commodities that feed directly into steelmaking. Iron ore is the most significant by volume. Coking coal provides the energy source for the blast furnace process. Manganese is used as an alloying agent in steel production and is a commodity where Australia holds a strong export position.

When Chinese steel mills increase output in response to stronger industrial demand, the throughput effect flows directly into demand for these inputs. For ASX-listed producers in iron ore, coking coal, and manganese, stronger Chinese industrial activity translates into volume support and, where supply is constrained, price support.

The mechanism matters here. This is not a sentiment-driven trade on Chinese equities. It is a demand-side observation: stronger industrial output requires more raw material inputs, and Australia is a major supplier of those inputs. For producers with low extraction costs and strong reserve positions, the margin benefit of sustained or improved pricing can be material.

The Caution: Energy Prices Not Yet Fully in Earnings

"We are cautious on the broader market's short-term positioning given we are still yet to see the full implications of elevated energy prices flowing through to earnings reports." Emanuel noted.

The recovery in Chinese industrial profits does not operate in isolation from the broader global environment. The energy shock of early 2026, driven by the ongoing Middle East conflict, has materially increased input costs across energy-intensive industries. Diesel prices in Australia rose 41 per cent in a single month between February and March 2026. For resources companies with significant transport and processing costs, that increase has not yet fully flowed through to reported earnings.

The Strait of Hormuz closure and its implications for commodity markets provides useful context for understanding the supply-side dynamics driving that energy cost increase. Results season will bring greater clarity on which producers have managed the cost increase effectively and which are more exposed. Until that picture is clearer, the market's current pricing of many resources companies may not fully reflect the cost pressures that are embedded in operations.

This is not a reason to avoid the sector. It is a reason to be selective within it, and to focus primary research on cost structures and balance sheet quality rather than making allocation decisions based on commodity price movements alone. Which ASX sectors face the most earnings risk in the current rate and energy environment is worth reading alongside this analysis.

Copper: Structurally Bullish, Near-Term Cautious

"Longer term we are bullish on copper, however we are cautious on the near-term outlook due to elevated energy prices flowing through to earnings." says Emanuel.

Copper occupies a distinct position in the resources landscape. The long-term demand thesis is intact and well understood: electrification, renewable energy infrastructure, and electric vehicle adoption all require substantially more copper per unit of output than the technologies they are replacing. That structural demand profile supports a positive medium-to-long-term view on copper pricing.

The near-term picture is more complex. Chinese construction activity, which drives a significant share of global copper demand, remains subdued relative to the levels that supported elevated copper prices in prior years. The demand recovery visible in industrial profits has not yet translated uniformly into construction-driven copper consumption.

Additionally, the same energy cost pressures that affect other parts of the resources sector are relevant for copper producers, many of whom operate energy-intensive smelting and processing operations. How the RBA rate cycle intersects with sector earnings adds further context to the cost environment copper producers are navigating. The timing of the copper recovery thesis is less certain than the direction of it, and that distinction matters for position sizing and entry discipline.

Battery Materials: Momentum Driven, Duration Uncertain

"Battery materials valuations have been driven higher by price momentum in lithium. Whilst demand has undoubtedly been driven by greater EV adoption due to higher petrol prices, it is yet to be seen if this trend will persist." says Emanuel.

Battery materials present a more complex analytical challenge than bulk industrial metals. The demand impulse from higher petrol prices is real. As the cost of operating a petrol-powered vehicle rises, the relative economics of electric vehicles improve, which accelerates adoption at the margin. That effect has been visible in EV sales data across key markets.

The question is whether that demand acceleration is durable or whether it reflects a short-term response to an acute price shock that may partially reverse. If energy prices moderate as Middle East tensions stabilise, the urgency of the economic case for EV adoption weakens. Battery materials valuations that have been driven by momentum in that scenario carry more downside risk than their current pricing reflects.

This is not a bearish call on the long-term battery materials thesis. The structural demand from electrification is not dependent on petrol prices remaining at current levels. It is an observation that the timing and pace of demand recovery in lithium and related materials is less predictable than consensus estimates have suggested, and that valuation discipline is warranted in this part of the sector.

Portfolio Construction Implications

The China industrial profit recovery supports a selective, research-led approach to Australian resources exposure rather than a broad sector allocation. The commodities with the most direct and near-term earnings support are those tied to steelmaking: iron ore, coking coal, and manganese. Producers with low costs, strong reserve bases, and manageable energy cost exposure are best placed to convert the demand signal into earnings growth.

Copper warrants a medium-term positive view, but near-term caution on timing and cost pressures. Battery materials require careful assessment of whether recent demand momentum is structural or partly cyclical given the energy price environment.

Across all of these, the energy cost question is not yet resolved in reported earnings. That uncertainty argues for individual company analysis rather than sector-level positioning, and for maintaining balance sheet discipline in how resources exposure is sized within a diversified portfolio.

The Datt Small Companies Fund applies primary research to the Australian small cap universe, which includes a number of resources companies that are under-researched relative to large cap peers. The March 2026 fund update outlines how the fund positioned into energy during the Middle East stress period, which is directly relevant to understanding the current resources thesis. Pricing inefficiencies in under-researched small cap resources companies can provide entry points that reflect the structural commodity thesis without the valuation premium that attaches to more widely followed names.

The Datt Absolute Return Fund provides the flexibility to hold positions across asset classes and sectors based on where the risk-adjusted opportunity is strongest at each point in the cycle, including selective exposure to resources where the fundamental case is supported by primary research.

Learn More About Our Funds

The Datt Absolute Return Fund and the Datt Small Companies Fund are available to wholesale and sophisticated investors. To understand how the funds approach resources sector positioning in the current environment, contact our Head of Distribution, Daniel Liptak, at daniel@datt.com.au.

Frequently Asked Questions

Which ASX resources sectors benefit most from China's industrial profit recovery?

The most direct beneficiaries are producers of bulk industrial metals used in steelmaking, including iron ore, coking coal, and manganese. These commodities have the most direct demand linkage to Chinese industrial output. Copper has a positive medium-term outlook but faces near-term uncertainty. Battery materials including lithium are subject to demand momentum that may partially reflect the current energy price environment rather than purely structural EV adoption.

Why is Datt Capital cautious on near-term resources positioning despite positive China data?

Elevated energy prices from the Middle East conflict have increased input costs across the resources sector. Those cost increases have not yet fully flowed through to reported earnings. Until results season provides greater clarity on which producers have managed those pressures effectively, broad sector positioning carries more risk than the headline commodity price data suggests.

What is the long-term view on copper for Australian investors?

The structural demand case for copper is intact over the medium to long term. Electrification, renewable energy infrastructure, and EV adoption all require substantially more copper per unit of output than incumbent technologies. Near-term caution reflects subdued Chinese construction activity and energy cost pressures on producers, not a change in the long-term thesis.

Are battery materials a good investment at current valuations?

Battery materials valuations have been supported by demand momentum linked to EV adoption, which has been accelerated by higher petrol prices. Whether that momentum persists depends partly on whether energy prices remain elevated. The long-term structural demand from electrification is not dependent on petrol prices, but the pace of recovery in the near term is less certain than current valuations in some battery materials producers reflect. Valuation discipline and stock selection are warranted.

How does Datt Capital approach small cap resources investment in Australia?

The Datt Small Companies Fund applies primary research to identify ASX small cap resources companies that are under-researched relative to their large cap peers. The focus is on business quality, cost position, reserve quality, and balance sheet strength rather than sector-level allocation. Pricing inefficiencies in under-researched small cap resources companies can provide entry points that are not available in more widely followed names.