On the supply side, through the power of the cycle itself, China’s overcapacity problem has been greatly improved, which is the main reason for this round of commodity surge.
However, since the demand side does not yet know the new demand points, the future rise of commodities will take longer than the market predicts, but the final increase will be smaller than everyone expected. .
(Jiangxi New Materials Co., Ltd.)
Four core questions about rising commodities
This wave of strong commodity gains was unexpected. Even though the three major futures exchanges have frequently raised transaction fees, and the National Development and Reform Commission has even held emergency meetings several times a week to try to curb the soaring prices, this has not effectively stopped the madness of the futures market. Why is this?
In this regard, there are four main mainstream explanations in the market: excessive currency issuance. However, Cheng Dinghua disagreed.
The theory of excessive currency development——
From 2011 to 2015, commodity prices fell by two-thirds. At that time, currency over-issuance was more serious than now, because in 2011, 2012, 13, 14, and 15 years, according to everyone’s standards Even if the currency is over-issued, then why has it been falling for almost five years in a row?
Exchange rate suppression theory——
Generally, commodities will not do well when the U.S. dollar is strong. But this year the US dollar is probably the strongest currency in the past 20 years. The US dollar has never been stronger than this year. But the bulk is stronger than the US dollar this year, and the bulk has risen far more than the US dollar this year, so this is different from what we imagined.
Risk aversion—
The increase in precious metals this year is very, very small. Gold has probably increased by less than 20% from the lowest point last year to now. The increase in coal is about 5 times that of gold. If you want to avoid risk, why not buy gold but buy coal?
Supply-side reform theory——
In fact, bulk price increases have little to do with this. Because if we only talk about supply-side reform, then theoretically speaking, coal and steel should rise, and other products that are not the main focus of supply-side reform should not rise. But the actual situation is not like this. The average increase in bulk prices this year is about 30%, and the range of rising prices is very wide, such as cotton and sugar, PVC, caustic soda, and soda ash. Without supply-side reform, it still rose very well.
Therefore, Cheng Dinghua believes that changes in the supply side do not entirely come from the national supply-side reform. There must be some reasons behind it. So where does it come from?
The power mainly comes from the cycle, which comes from a natural force.
As for “the so-called power of cycles and the power of nature”, Cheng Dinghua pointed to excess production capacity and proposed a different overcapacity that is different from public perception, that is, “The actual effective production capacity is far greater than imagined Less“:
The actual situation is not what everyone imagines. At the micro level, great changes have actually taken place. The change is thatyou think there are still a lot of companies in it and excess capacity, but in fact it is not that many because in the past three or four years, they have all died.
Why have products increased so much?
So, how to understand the astonishing rise? Cheng Dinghua believes that the main reason is that industry concentration has increased:
In the past five years, all traditional industries have experienced an increase in industry concentration, and the rate of increase in industry concentration has been extremely fast. In other words, in many industries, the actual effective production capacity is only for the top 10 companies. Although the companies after the top 10 still have production capacity, they no longer produce much, so In many of our traditional industries, the situation of overcapacity is not as serious as everyone imagines. This can also explain why fixed asset investment, especially private investment, has experienced a collapse-like decline while commodity prices have risen.
In all traditional manufacturing industries dominated by private enterprises, there has been what I call an increase in industry concentration. Only the production capacity of the top 10 and top 20 is actually effective, so it is not what everyone imagines. There’s such a big surplus in that place.
Increased industry concentration… is the reason why bulk prices can rise sharply this year without any stimulation of demand.
Cheng Dinghua also emphasized:
Many problems at the macro level are related to the meso and micro levels, but if you do not understand the changes that have occurred in the micro and meso areas, and then judge a problem in the macro area, sometimes very serious consequences will occur. deviation.
Good signs at the micro level
At this time, a new question arises: Commodity prices have risen so much, why has production capacity not been restored? Cheng Dinghua believes:
Commodity prices have fallen for five years, which has destroyed the balance sheets of most companies. Now the price of the entire bulk has just begun to rise, and the distance between them and their asset liability has just begun to rise.The balance sheet is still far from being repaired, which is why large companies are unwilling to expand production capacity because they have not repaired their balance sheets and the original holes have not been filled, so they are unwilling to do this. For small businesses, production capacity has actually been lost over the past four or five years. If you want to start over now, no one will lend you money. Therefore, small businesses have no way to restore production capacity now.
In Cheng Dinghua’s view, some good phenomena have appeared at the micro level in China, which will drive the commodity market:
When industry concentration increases and small companies die, you suddenly find that the corporate profits of listed companies have seen a huge improvement, so since August and September this year, you have seen traditional Industry companies, whether it is construction machinery, coal, or papermaking, all have seen a great improvement in the profitability of the top companies. I think this is a big improvement.
My judgment on the overall overcapacity is that if there is no significant change in demand, China’s entire overcapacity will be completely eliminated in two or three years, so it is not as big a problem as everyone thinks.
Generally speaking,on the supply side, through the power of the cycle itself, the problem of overcapacity has been greatly improved in China. On the demand side, it is still unclear where the new demand points are, so for bulk commodities I think this view will last longer than everyone thinks, and its final adjustment will be smaller than everyone thinks.
