The global flood superimposed economic recovery has spawned an unusual commodity bull market, and a year later, instead of returning to normal, the super market intensified. Just after the Spring Festival in late February, Citic Securities shouted a copper price of 12000 US dollars per tonne. At that time, the price of copper in London was more than 8000 US dollars. At one point, it stood at 10000 US dollars, which was amazing.

A week ago, the suspension of economic dialogue between China and Australia stimulated iron ore futures to pull out a limit, driving other industrial materials to soar across the board, followed by a series of commodity price increases by the National standing Committee. It is required to attach great importance to the adverse effects of rising commodity prices.，We will ensure the supply of commodities, curb the unreasonable rise in prices, and prevent transmission to consumer prices.

Regulation, regulation and regulation, commodities collective pullback.

As of today, black commodities have plunged sharply, iron ore futures have fallen more than 20% from their high on May 12, and thermal coal futures have been particularly tragic, withdrawing 25%, with the exception of grain futures coming out of the post-holiday A-share market.

The end of the carnival? Can the commodity bull market continue? Will fears of high inflation trigger a bigger crash?

After figuring out the logic of commodity price movements, these questions are not difficult to answer.

Crazy "Stone"

The global epidemic broke out in April last year, throwing out a big hole in asset prices, and commodities are no exception. Then, the Federal Reserve took the lead in releasing water, and trillions of dollars were released to the market. As a result, commodities ushered in a wave of upland onion-like rise, and prices went to their highs of nearly two decades. Some varieties that have risen sharply before, such as iron ore and rebar, have already reached new highs.

Since April last year, most industrial raw materials have doubled, and there are more and more bullish institutions and brokerages. Goldman Sachs is the well-deserved trumpeter, supporting it three times in August, December and April this year, and issuing a special report before May Day to continue to be bullish on commodities.

The last time commodities were so crazy, even after the subprime crisis in 2008, supply-side reforms were worse in 2017. Comparing the two situations, the two are also a "deep V" trend, and the logic is also very similar:Demand has been boosted by a flood of liquidity and economic recovery.

Generally speaking, there are two factors that determine the trend of commodity prices-the structure of supply and demand and loose monetary policy.For example, before February this year, commodity prices consolidated for nearly three months, in addition to digesting the previous increase, the biggest reason is the escalation of the epidemic in Europe, the re-blockade led to stagnant demand growth.

This is why the stock and commodity markets have plunged after the release of the US CPI data in April, and it is easy to understand what investors are thinking: 4.2 per cent of CPI not only exceeded 3.6 per cent expectations, but also hit a 13-year high.The chances that the Fed will be forced to raise interest rates ahead of time will increase, because neither hyperinflation nor stagflation is something that a central bank does not want to see.

In addition to political factors, commodity prices are generally mainly volume-driven, and scarcity premiums occur when demand exceeds supply, and such premiums are difficult to be priced by the market in advance.

Due to the short-term inflexibility of commodity supply, it is easy to underestimate the extent of the shortage in the face of the coming large-scale demand growth. after all, it is impossible for suppliers to dig a new mine or plant a new crop in a few months.

With the recovery of these giant economies in China, the US and Europe, demand for commodities is also growing. China consumes nearly 40 per cent of the world's commodities each year, with copper and aluminium accounting for more than half, while the US consumes about 15 per cent, according to the data. But the problem is that the producers of most bulk raw materials are in third world countries, such as Chile, Brazil and other South American countries, where epidemics are still raging and supplies of raw materials are limited because of management problems and inadequate vaccines.

Therefore, in the current commodity structure, supply dominates the price.

Is it easier for commodities to rise than to fall?

After the reform and opening up, it took China 30 years to complete a miracle. In 2010, China officially overtook Japan to become the world's second largest economy and successfully stepped into a middle-income country. However, when preoccupied with running fast, the disadvantages are also obvious. over the years, many industries have been carrying out blind expansion and long-term extensive management model, and the problems of overcapacity and zombie enterprises can no longer be avoided. the steel and coal industries are particularly serious.

As a result, the spring tide surged in 2016, and a vigorous supply-side reform opened the curtain of "eliminating production capacity, removing inventory and deleveraging".To some extent, this wave of structural shifts has revolutionized the logic of commodities.

As a result, China has restored a new balance of supply and demand, from overcapacity to supply less than demand.

This can be confirmed by the trend of production price index (PPI) and consumer price index (CPI). PPI is mainly affected by the prices of commodities, especially industrial raw materials, and CPI corresponds to the price level of commodities in society as a whole. After the supply-side reform in 2016, there has been an obvious deviation between PPI and CPI. The core reason is that CPI is still affected by demand fluctuations, while PPI begins to be supply-oriented, and their guidance systems are no longer the same.

When the supply exceeds the demand, the demand is the "speaker".The increase or decrease in the supply of commodities has little impact on prices; conversely, when supply exceeds demand, supply dominates prices and a move in demand has little impact.

From the historical price of rebar, we can see that 2018 is a downward cycle of the economy. Although the growth rate of GDP has declined, the price drop of rebar is not obvious compared with that before the supply reform.

Just now, the world has begun the so-called "carbon neutralization" long-term plan, which has actually further reduced supply-side production capacity under the banner of "green environmental protection". At the same time, the "production restriction order" of the domestic iron and steel industry has also been further upgraded. This means that under the current structure, commodity prices are easier to rise than fall.

Therefore, whether the commodity carnival can continue depends on the epidemic situation in South American countries such as Chile and Brazil. If the recovery is good and the supply side starts to operate, this wave of commodity cattle will almost come to an end. Of course, as a trading financial asset, the price of commodities depends on the face of the Federal Reserve.

Conclusion

The development of a country from 0 to 1, from 1 to 100, is also a process from supply falling short of demand to oversupply, and then either through the market or through the government to eliminate production capacity and inventory, and return to the structure that supply exceeds demand. Form one cycle after another.

This is the inevitable outcome of market economy.In this cycle, history repeats itself, bubbles are blown up and burst, and some people enjoy going back and forth, some people make a lot of money, and some people lose all their money, but in the end, all the revelry will come to an end, even if there is no machete on the policy side.

Back in the current market, the hot re-inflationary trading of commodities has come to an end with the rising expectations of interest rate increases brought about by inflationary pressures and the intervention of strong state regulation.

In May, the epidemic in Europe has eased, the global economy has accelerated recovery, the demand side of commodities is still strong, while the pressure from the supply side has not improved much.So the pressure to raise prices will remain in the short term.

But it is easier to rise than to fall, and it will fall in the end. This is the case now, and it is bound to be so in the future.