The Far-reaching Impact of El Niño: The Return of Carbon-based Inflation and the Early Arrival of Silicon-based Asset Revaluation

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A new round of moderate and stronger El Niño events has basically been confirmed for 2026. The deep resonance between this extreme weather supply shock and high geopolitical risk premium is reshaping the global pricing landscape for commodities. Through the carbon-based cost transmission chain, it is delivering an unexpectedly early blow to the valuation logic of the silicon-based technology industry.

The macro team of Zheshang Securities pointed out in their latest in-depth report that there are two core expectation gaps in this round of El Niño:

First, the main rain belt is structurally shifting north under global warming, breaking the traditional "southern flooding, northern drought" paradigm, bringing atypical repricing to commodity supply structures; second, the carbon-based supply shock induced by El Niño may significantly advance the silicon-based valuation adjustment and credit risk, originally expected to emerge only in 2027.

As of late May 2026, the sea surface temperature in the Niño 3.4 region has risen to +0.67°C to +0.9°C, and the SOI index has fallen sharply to a range of -11 to -13.4. All major meteorological agencies unanimously predict that the El Niño state will be officially established from May to July this year, with a sustained probability as high as 82%.

The reduction elasticity for tropical soft commodities such as palm oil will be significantly stronger than that of rubber, and speculative funds have accelerated their focused layout in soft commodities in the second quarter. Meanwhile, tightening copper supply, combined with rising electricity costs in data centers, will suppress technology asset valuations from both the denominator and numerator sides. The rebound in global inflation stickiness will also constrain the Fed's rate-cutting scope.

Historical Review: El Niño's Pricing Highly Depends on Macro Cycles

Zheshang Securities’ asset price review of the three super El Niño events in 1982-1983, 1997-1998, and 2014-2016 shows that there is usually a 9-12 month lag for extreme climate disruption to physical output, with the main bull runs for core varieties like palm oil and rubber only fully established after harvest periods and meteorological peaks; energy commodities exhibit a stage characteristic of "pressure in winter due to warm winter, main bull run driven by high summer temperatures."

The final pricing outcomes of the three events were deeply dependent on the macro environment at the time.

In the 1982-1983 event, Volcker’s high interest rate policy resonated with the Latin American debt crisis, U.S. stocks strengthened due to the liquidity inflection point, while emerging markets suffered capital outflow and local currency collapse;

In the 1997-1998 event, the demand collapse triggered by the Asian financial crisis completely outweighed the supply shrinkage narrative. Varieties like palm oil rose first and then fell sharply, and Indonesia’s real GDP recorded nearly a 14% recession;

In the 2014-2016 event, China’s supply-side structural reform resonated positively with climate shocks, and prices of palm oil and natural rubber rose significantly, while Brent crude oil, due to a warm winter and supply-demand imbalance, fell below 30 USD/barrel.

History also reveals a clear tail risk: when long positions are highly crowded, a systemic shock on the demand side that hasn't been priced in can trigger a dramatic collapse in commodity prices. The event in 1997 stands out as the most typical case.

Climate Signals: Rain Belt North Shift Overturns Traditional Pricing Maps

The expectation gap most easily overlooked by the market in this round of El Niño lies in the substantive overlap of the global warming base and the structural north shift of the main rain belt.

Zheshang Securities pointed out that the pronounced positive anomaly of sea temperature in the eastern equatorial Pacific is forcing the northwest Pacific subtropical high to expand its area and strengthen, continuously transporting warm, humid tropical air to China’s interior. By May 2026, China has already entered a period of abnormally high rainfall.

This mechanism will potentially reverse traditional meteorological paradigms domestically: main grain-producing areas such as the North China Plain and Northeast China face extreme flooding risk far above historical averages, while the southwest and middle-lower Yangtze River regions may see 'dog days' droughts and extreme heat because of atypical northward shift of the subtropical high.

This spatial mismatch will disrupt previous energy trading logic—hydropower storage in southern provinces faces unexpected shortfalls due to 'flash droughts', making it unable to effectively replace thermal power during peak summer demand, leading to soaring demand for thermal coal and conventional power.

In global tropical agricultural products, the northward move of the rain belt likewise creates substantial geographic differentiation.

Production regions in Thailand, Vietnam and the Indochina Peninsula, being at the rain belt’s northern edge, may experience less drought than historical typical periods; whereas Indonesia’s central-southern and Sumatra oil palm core planting zones will face more extreme dry periods. This implies that the current market logic of undifferentiated output reduction pricing for all Southeast Asian agricultural products contains internal turbulence risks—with palm oil’s actual production reduction likely to be significantly greater, and over a longer duration, than rubber.

Carbon-Based Impacts: Copper Mine Flooding and High-Temperature Power Use Dual Pressure

Zheshang Securities' second major expectation gap is that El Niño-induced carbon-based supply shocks may burst the silicon-based inflation bubble ahead of schedule. The transmission path is clearly divided into two levels.

The first is the direct tightening of carbon-based resource supply.

Extreme rainfall triggered by El Niño causes phased obstacles to mining and logistics in core copper-producing regions such as Chile and Peru, leading to tight supply and a higher price center for industrial metals. Currently, LME aluminum has entered backwardation, and the copper market overall is in the devaluation phase after the 2025 short squeeze.

Meanwhile, extreme summer heat in the southwestern U.S. (Texas ERCOT and California Grid) will greatly increase cooling electricity loads, testing the marginal capacity of energy infrastructure.

The second is the transmission of carbon-based costs to the silicon-based industrial chain.

Industrial metals like copper, as basic materials for power grid upgrades, transformer manufacturing, and data center infrastructure, will see their price rises directly increase the marginal capital expenditure costs for AI upstream. Summer electricity peaks triggered by extreme heat are likely to create potential conflicts between high-energy computing data center demands and civilian power needs, meaning some high-energy AI clusters may face regional or phased power restrictions, causing physical constraints on linear expansion expectations for compute infrastructure.

The above external cost increase will amplify financial vulnerability within the silicon-based industrial chain.

Currently, downstream AI general models are locked in fierce price wars with slow commercial monetization, relying heavily on primary market financing. As macro inflation pressures and supply chain cost increases transmit to tech companies, leading to widening credit spreads and higher financing costs, some compute startups lacking internal cash generation will see their cash flow consumed even faster. The valuation premium originally expected to last until 2027 faces the risk of being cleared early.

Monetary Policy: Inflation Stickiness Restrains Rate Cuts and Valuation Pressure Is Transmitted from the Denominator

From the perspective of macro policy paths, price increases caused by disaster-induced production reductions in global soft commodities and South American industrial metals will transmit to U.S. core inflation indicators through the global supply chain.

Zheshang Securities believes that this structural inflation stickiness will limit the market’s marginal expectation of a certain Fed rate cut in the second half of 2026, forcing real interest rates to remain high for longer and thus exert valuation suppression from the denominator side on high-valuation sectors (like MAG7 and the semiconductor industry chain).

The general rise in food and energy prices may weaken the explanatory power of trimmed mean PCE for cooling inflation.

Faced with the dual pressures of valuation under siege from the denominator side and blocked profit realization from the numerator, tech asset prices are due for restructuring; meanwhile, the slowdown in tech sector prosperity will marginally worsen fiscal revenue and thus amplify sovereign debt credit risks against a backdrop of high deficits.

Three-Signal Framework: From "Storytelling" to "Seeing Reality"

To track the 2026 El Niño, Zheshang Securities has constructed a triple signal verification framework covering climate, supply-demand, and capital.

The climate signal is the left-side forward-looking indicator, mainly tracking weekly rainfall and VHI vegetation health index in key Indonesian and Malaysian production areas;

The supply-demand signal is the midstream verification indicator, focusing on the rate of monthly palm oil inventory destocking by Malaysia Palm Oil Board (MPOB) and output data from the Association of Natural Rubber Producing Countries (ANRPC);

The capital signal is the right-side confirmation indicator, focusing on the structural shift in palm oil futures spreads from contango to backwardation and the continuous expansion of CFTC non-commercial net long positions.

Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not take into account individual users' special investment goals, financial conditions, or needs. Users should consider whether any opinions, perspectives, or conclusions in this article fit their particular circumstances. Investing based on this, responsibility is your own. ```