Rising inflation and inflation expectation have been the market focus globally this year, as the world economy recovers from the pandemic amid economic stimulus and vaccine rollout. In China, the divergence between PPI and CPI is gaining traction, with PPI surging on the back of global commodities prices and CPI posting modest growth. 

Commodities prices have experienced strong growth over the past 3-5 months, driven by recovering downstream demand and tight supply amid environmental protection and safety- related policies. Our global commodity team revised up its metal prices forecasts to reflect positive outlook for aluminum and copper, given solid downstream demand driven by decarbonisation initiatives amid tight supply. Copper and aluminum prices forecasts were raised by 16%/6%/7% and 18%/39%/45% for 2021E/22E/23E, respectively.  

We expect the strong momentum in PPI reflation to likely continue in the next few months, benefiting upstream industries. Our sensitivity analysis suggests that producers of commodities like aluminum, copper and oil are likely to be the major beneficiaries. Industrial companies will be under cost pressure, which, in our view, is manageable though. Independent power producers have unfavourable exposure to coal, while auto parts suppliers and truck makers are most likely to see overall negative impact.  

Our China commodity team raised its forecast of Zijin and Chalco (our top picks) to reflect higher global commodity price forecast. The team tweaked down earnings for Jiangxi Copper H & A and downgraded Jiangxi Copper (H) to UNDERPERFORM (from Neutral), given its higher exposure to smelting than pure mining. In quantitative terms, our commodity team’s correlation analysis reflects that stocks like MMG, Chalco, and Baosteel tend to move in sync with the PPI-CPI spread. In contrast, construction machinery makers like Xugong and independent power producers including Datang, Huaneng, and Huadian tend to perform in different directions.