In recent months, the global commodities market has experienced a significant surge led primarily by gold and copper, which exhibit strong structural characteristicsThis uptick is largely driven by supply constraints rather than overwhelming global economic demand, thus it does not appear sufficient to trigger a fully-fledged commodity bull marketThe recovery of China's Producer Price Index (PPI) from its lows likely hinges on the sustained revival of domestic demand.

Starting early this year, international commodities managed to break out of a previous state of stagnation and have been registering price increases across the boardPrecious metals like gold and industrial metals such as copper have soared to historic highs, while crude oil—often referred to as the "king of commodities"—has also seen a revival, gradually impacting other commodities as well

Correspondingly, the A-share market in China has shown an improving performance among sectors tied to these price hikes.

What underpins this commodity price increase? Will this trend translate into a rebound in domestic price levels? The primary drivers behind the rise in commodity prices include better-than-expected global demand and some supply constraintsHowever, when comparing the scale and logic of the current price surge to the dramatic rise seen from 2020 to 2021, it is evident that the current rally is significantly weaker.

According to CITIC Construction Investment Securities, the overseas impetus for rising prices fundamentally rests on supply narratives in the context of steady demandThe underlying macro drivers for domestic price increases stem from recently lowered inflation expectations

• Poland Releases Butter Reserves to Combat Price Surge
• Hong Kong Privatizations Offer Investment Plays
• The Significance of Price
• U.S. Inflation Risks Rising Significantly Next Year
• The Fed's QT Approaches a Turning Point

However, insufficient evidence of inflationary trading courses through broader assets and macro indicators complicates the narrative—a view confirmed by the contrasting pricing direction seen in China's debt market, domestic black commodity prices, and the fragments of the CPI and PPI.

Gold and copper have been the standout performers in these recent price surges.

In this round of commodities price increases, gold from the precious metals category and copper from the non-ferrous metals category have been of particular noteCOMEX gold prices surged from under $1850 per ounce at the beginning of October 2023 to over $2450, representing an increase exceeding 30%, with gold consistently hitting new highsCOMEX copper futures prices have similarly jumped approximately 40% since February, achieving a historic peak of 519.9 cents per pound on May 20.

Often dubbed the "Doctor Copper," copper's price fluctuations frequently signal the health of the global economy, particularly the manufacturing sector

Its record-high prices have sparked widespread speculation, leaving market observers to ponder whether the global economy is primed for explosive growth and whether a significant commodities bull run is imminent.

Since the beginning of the year, crude oil prices have also experienced an increase, though not nearly as aggressive as gold and copperWTI crude oil saw prices rise from $72 per barrel at the start of the year to $86 by early AprilHowever, prices have since tapered off, dropping below $80.

In recent weeks, price increases have also begun to pervade the chemical sector, impacting products such as sulfuric acid and petrobenzene, while smaller metals like tin, molybdenum, antimony, and tungsten have begun to accelerate in price.

Since March, the most substantial gains in the A-share market have typically been in the non-ferrous metal sectors, with the basic chemical, oil and petrochemical, and agricultural sectors also performing relatively well, closely tied to the rising prices of related commodities.

Nonetheless, this particular surge in commodities remains confined to a limited selection of products and does not represent a classic commodities bull market

Crude oil, which exerts greater economic influence and has a broader impact, has seen only a minor rebound and has yet to demonstrate a consistent upward trajectoryLikewise, the prices of rebar and iron ore, which reflect domestic consumption in China, have not fully escaped their low points.

Gold occupies a unique niche as an asset that embodies both commodity and financial characteristics; it is lauded for its inflation-hedging and risk-averse attributesIts supply is extremely scarce, leading to an upward-price dynamic that is often easier to initiate than to retractSince 2000, apart from a sustained downturn from 2012 to 2017, gold prices have largely been on the rise.

The recent climb in gold prices has roots that diverge from traditional metrics, such as global inflation trends, and run counter to the negative correlation typically observed with real interest rates

The driving force behind this strong demand may very well stem from the persistent increases in purchases by central banks worldwideData from the World Gold Council suggests that in 2023, central banks purchased a staggering 1037 tons of gold, second only to the record 1082 tons set in 2022. Estimates indicate that the total global official gold reserves now stand at 36,700 tons, with a striking trend of net purchases by global central banks—amounting to over 7800 tons since 2010, of which more than a quarter occurred within the past two yearsNotably, the push to accumulate gold among central banks has been predominantly concentrated in emerging market economies.

Following the 2008 global financial crisis, the world economy was stalled for an extended period, prompting a rise in geopolitical conflicts and accelerated trends of de-globalization and de-dollarization

In response, many central banks began to increasingly favor gold as an alternative to dollar-denominated assets.

The recent surge in copper prices is not solely demand-driven; short-term supply dynamics and speculative pressure from the futures market have also played significant roles.

Today, "Doctor Copper" may no longer serve merely as a gauge for the state of traditional global manufacturingRather, demand from emerging industries is beginning to express an increasing marginal influence, outpacing stagnant traditional industrial needsAccording to China International Capital Corporation (CICC), sustained demand from energy transition, along with surging demand associated with AI-driven data centers, is expected to form new growth segments for copper consumption

The anticipated demand from electric vehicles, solar energy production, and wind energy is slated to maintain robust growth over the next five years, accounting for over 16% of global demand by 2028. The rapid growth in computing power driven by AI-related applications will also continue to drive demand for electricity among data centers, potentially fostering further demand for copper.

From a supply standpoint, CICC has indicated that since early 2024, copper concentrate supply has been tightening, pushing output reductions at the smelting stageData from the International Copper Study Group (ICSG) reveals that while global copper concentrate output has risen by 2.6% year-on-year as of January 2024, capacity utilization rates have plummeted to a near 10-year low of 74.6%. The shutdown of the Cobre Panama copper mine, operated by First Quantum, was announced earlier in 2023, with little hope of recommencement before late 2024. Further complicating matters are various disruptions impacting supply, including production guidance cuts from Anglo-American's Los Bronces, environmental challenges faced by Vale's Sossego mine, strikes impacting Codelco’s Tomic operations, and severe weather events hindering output at Ivanhoe Mines' Kamoa-Kakula project as well as roadblocks affecting MMG's Las Bambas mine.

Indeed, 2023 saw the U.S

and U.Kprohibiting metal exchanges like the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) from accepting newly produced aluminum, copper, and nickel from Russia, a decision that dramatically impacted copper futures delivery and spurred so-called "short squeeze" conditions.

Will we see a "second wave" of inflation globally?

The May statement from the Federal Reserve indicated, "There has been insufficient progress toward the 2% inflation target in recent months." The Fed's hesitation to advance interest rate cuts amid rising commodity prices has led to concerns in market circles regarding the possibility of a "second wave" of inflation.

Historically, a comprehensive rise in commodities and a surge in global inflation typically coincide with loose policies and explosive demand

The inflation faced globally between 2021 and 2022 primarily derived from the pandemic shock that prompted central banks in Europe and America to unleash aggressive liquidity measuresThe rapid recovery in demand contrasted with a sluggish supply rebound, generating a commodities bull run.

The current commodities price upswing indeed reflects stronger-than-expected global economic activityDespite a backdrop of high interest rates, the U.Seconomy posted a 2.5% growth in 2023, contrasted with little weakening in the labor market and robust recovery in the real estate sectorThis burgeoning activity has fostered increased demand for several commodities.

Since the beginning of the year, the Morgan Global Manufacturing PMI index has consistently indicated expansion, lending credence to the idea of an uptick in global demand validated by export figures

For instance, China's exports (measured in dollars) grew by 1.5% year-over-year in the first quarter, reversing a previous trend of negative growth in 2023. Additionally, Vietnam saw nearly 15% export growth, while South Korea’s export growth reached 8.3%. All of these trends displayed a sustained recovery trajectory starting from Q4 of 2023.

Yet, could the current level of global economic recovery incite a fresh wave of inflation? CITIC Construction Investment Securities adopts a cautious stance on this matter, asserting that a new cycle of credit expansion overseas has yet to materializeThe prevailing logic of rising prices is intrinsically tied to supply constraints operating within relatively stable demand scenariosIn the absence of continuous economic growth or clear market transitions, pricing remains dictated by marginal shifts

This explains the substantial price increases observed year-to-date among commodities such as copper, small metals, shipping, and transport—all elements that operate under conditions where stable demand meets constrained supply narratives.

Moreover, CICC has posited that various new factors may disrupt existing commodity market equilibriumSince 2023, the enhancement of industrial activity in India signifies a potential rise in demand for energy, black metals, and nonferrous metals, spurred on by ongoing industrialization and urbanization movesIndia’s economy continues to exhibit robust growth, with the eight core industrial production indexes remaining above long-term trend lines.

In the realm of new energy demand, the attributes of copper, aluminum, and other nonferrous metals increasingly align with renewable energy applications

Throughout this surge period, certain nonferrous metals with substantial shares in green demand—like nickel, copper, and tin—are demonstrating pronounced pricing advantages amid this commodity boom.

CICC maintains that, as the global manufacturing cycle restarts, supply chains undergo reconfiguration, and geopolitical tensions exacerbate within the impetus for global re-industrialization, the material influences of these changes—combined with a supercycle in its initial stages—may culminate in sustained robust demand from overseas markets like the U.S., juxtaposed against inadequate supply, thus keeping inflation rates elevated over prolonged periods.

From policy perspectives, major Western economies have largely concluded tightening cycles but remain vigilant against inflation

Even when the Federal Reserve initiates interest rate cuts, these are unlikely to be significantRather, they will likely reflect a compromise aimed at balancing inflationary pressures with economic stabilityWithout substantial liquidity injections from the Fed, initiating a broad-based commodities bull market could prove challenging.

When will China’s PPI rebound?

The persistently low price levels have emerged as a fundamental tension within China’s economic recovery effortsWill the recent uptick in commodities prices propel the PPI out of its trough and elevate the CPI accordingly?

An analysis of the PPI’s composition reveals that it heavily relies on six industries: chemical processing, black metallurgy, petroleum and coal processing, coal extraction, non-metallic mineral products, and nonferrous metal processing, together accounting for a staggering 75% of contributions

As a result, fluctuations in the prices of key commodities like crude oil, coal, steel, iron ore, and copper significantly affect PPI outcomes.

While oil and copper prices are significantly influenced by global supply and demand dynamics, black commodity prices tend to reflect domestic demand more acutely, implying that domestic demand likely exerts a greater influence on PPI metrics.

According to analysis from China Merchants Securities, the direct impact of exports on PPI has been minimal, instead exerting influence via global trade health and commodity price fluctuations—essentially manifesting as imported inflationChina's heavy reliance on imports of commodities such as nonferrous metals and energy resources, including crude oil, iron ore, copper, and aluminum, underscores this phenomenon.

Among domestic drivers, real estate and infrastructure investments wield considerable weight over PPI

During the five previous PPI upturn cycles prior to 2015, the average growth rate of real estate investment was 25.3%. In contrast, post-2015, the average growth for the subsequent two PPI upturn cycles dwindled to just 6.2%. However, infrastructure investment has served as a complementary mechanism alongside real estate in governmental counter-cyclical adjustments.

Interestingly, the current economic recovery in China appears to diverge from historical patternsThe impetus for growth no longer primarily stems from real estate and infrastructure; instead, service consumption and high-quality growth sectors have emerged as the driving forcesIn similar economic growth contexts, decreased demand for oil and black resource materials may elucidate why the PPI has not surged as rapidly in this cycle as in previous recoveries.

Merchant Securities has pointed out that historical data suggest a 3- to 9-month lead time between real estate investment growth rates and cumulative year-on-year changes in PPI