The trade war between the US and China has remained in the news and with it the commodity market has also been affected. While the two superpowers remain at loggerheads with each other, the disruptions in the global supply chains and the trade flow have brought about a change in the dynamics of global trade and influenced metals, energy and agro commodities. This article dwells on the impact of the trade war on each category of the commodity market and also paints a picture for the times ahead.
The agricultural markets have arguably been affected the most out of all the asset classes. Due to the export prowess of the US agriculture sector and political dominance, the US has made the primary sector as a prime target for retaliatory purpose. When Trump imposed import tariffs, China responded with their sanctions against the soybean shipments to its country. This led to a disappearance in the US flow of soybean to China triggering the replacement with the Brazilian product. The tariffs have had two major effects on the price. Firstly, due to the direct reaction to the loss of the Chinese buyers, the US grains suffered. Secondly, the price spread between different growing regions became more distinct and the volatility increased.
The pages of history show that a short disruption in the grains markets can have a significant impact. Jimmy Carter’s grain embargo against then Soviet Union in the 1980s led to the emergence of new export hubs in Ukraine and South America. In hindsight, the soybean industry of Brazil may never have a better promoter and catalyst than the current trade war.
With numerous factors driving simultaneously on the oil markets, the impact of the trade war on the oil markets is unclear. The weakening global economic outlook and the higher shale oil production is inevitably offset by the OPEC production cuts and the increasing geopolitical risk in the Middle East region. Market pundits opine that the trade way may not be having the desired effect on the price of oil thus far since China was reluctant to impose import tariffs on US crude supply. However, the exports of crude oil from the US shores to China declined to zero between August and October 2018, recovering in the period thereafter.
Trade negotiations have involved the use of crude oil imports between the two nations. On the US side, the good news is that the demand from China for their products have significantly being replaced with higher imports from other Asian nations notably South Korea. The significance of this information is that the Chinese economy has categorised crude oil imports as an important driver to their economy. Unlike in the case of soybean, the Chinese economy does not have adequate suppliers to replace the US product in the long term perspective.
To protect the domestic producers, tariffs on steel imports hiked the US domestic price in comparison to global benchmark prices reflecting the price differences region wise. Steel prices have declined over the past year as the industry suffered from low demand particularly from gas and oil sectors. The indicator of the positioning of the global economy, copper also slumped as the trade war inflicted uncertainty and enveloped the global economic outlook in dark clouds. The future direction of the trade war is not clear. On one hand, the clouds may clear leading to a sudden positive ending. On the contrary, the clouds could further escalate shrouding the global economy in further chaos and conundrum.
Although the commodity trade flows on either side of the Atlantic Ocean, i.e. the European belt and the US belt, have not been disrupted yet, the EU could be the next target if the trade war intensifies. For example, in the case of US steel which is suffering from slumping demand, the effects of the trade war could spread like a virus and feed through to the real economy. Changing fortunes of the commodity market and increased divergence in regional price have shown that the trade war in most ways is also creating trading opportunities. Market analysts have opined that as the trade war continues, the effects will be more profound and significant. New trade relationships could be formed and the global commodity flows will be rerouted to other nations as we wait for the unfolding of a new chapter in this ongoing saga.
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at firstname.lastname@example.org