Under the influence of multiple factors, commodity prices have risen rapidly recently.

Expectations of a recovery in global demand have continued to drive commodity prices since the shock of the COVID-19 epidemic in 2020. At the same time, the Fed has not substantially tightened, and liquidity in the overseas financial system is still abundant.

Driven by the mismatch between supply and demand and loose liquidity, commodity prices have risen rapidly again recently.

We discuss the three main factors of this round of price rise from the point of view of demand-side, supply-side and industrial chain security.

Demand side: global inventory replenishment, more reflected in structural differentiation. Recently, vaccination in developed countries is expected to boost global demand. However, compared with the last round of supply-side reforms, total domestic demand may not be as good as 2016-2017, and the recovery of demand is characterized by structural differentiation led by exports and emerging industries.

Supply side: emerging market recovery lags behind + "carbon neutralization" drives prices up. The dislocation of the recovery of the COVID-19 epidemic in raw material producing and consuming countries has exacerbated the mismatch between supply and demand of bulk raw materials, pushing up prices. Production restrictions related to "carbon neutralization" have also raised expectations of price increases.

Industrial chain security: geopolitical frictions and concerns about industrial chain security further intensify the short-term mismatch between supply and demand, which is also a new factor compared with the supply-side reform period.

The industry impact of large price increases:

Compress downstream earnings, but there is differentiation. In the supply-side reform from 2016 to 2017, the gross profit margin of the upstream price-rising industries such as coal and iron and steel increased greatly, while the gross profit margin of the middle and lower reaches decreased generally. The current round of gross profit margin of the upstream raw materials industry has increased significantly, but the gross profit margin of the middle and lower reaches of the industry is differentiated. The gross profit margin of the export industry chain such as computers, instruments and meters rose instead of falling, but the profits of textile clothing, wood processing, food processing and other industries were more compressed than those in 2016-2017.

How many economic recovery expectations have been caused by the massive rise "Price in"?

From the historical point of view, the rise in commodity prices is highly related to the economic growth rate and the degree of water release between China and the United States.

Represented by the copper price, the current copper price is at an all-time high and matches the expectation of economic growth in 2021, but it fully reflects the expectation of economic rebound and water release for the whole year.

As the rapid economic rebound and inventory replenishment brought about by COVID-19 's impact also have temporary factors, after the short-term mismatch between supply and demand is gradually eliminated, we also need to pay attention to the decline of fundamental support.

Pay attention to the impact of further commodity price increases on monetary policy. As commodity prices rise, PPI could rise to around 7 per cent in the coming months. The politburo meeting in April showed that the current policy focus was on economic restructuring and solving the stock debt problem, with little concern about short-term imported inflation. In the future, monetary policy may keep more "discretionary choice" and pay attention to the transmission effect of PPI to CPI.

Risk hints: economic and inflation changes exceed expectations, and geopolitical factors lead to fluctuations in the prices of related raw materials.