At a Glance
- U.S. soybeans remain one of the most affected U.S. commodities in the trade war, and history suggests there could be lasting effects
- No increased tariffs on oil could mean that U.S. crude remains too important to the Chinese economy
Because commodities are globally traded, they have been in the eye of the trade war storm for the past year. As global supply chains and trade flows adjust to the new reality, we look at the effects on metals, agriculture and energy. Will they have a lasting influence on commodity trade flows?
Agriculture A Prime Target
Of all three asset classes, agricultural markets have arguably been the most affected. This is due both to the export prowess of the U.S. agricultural sector and to its political significance –making the sector a prime target for retaliatory tariffs.
As China responded to Trump’s import tariffs, soybean shipments to China all but disappeared and were replaced by Brazilian product.
The tariffs have had two main effects on the price: U.S. grains suffered as a direct reaction to the loss of Chinese buyers, and the price spread between different growing regions became more pronounced and volatile.
Are trade flows likely to reverse to the old ways once China and the U.S. can agree on a new economic relationship?
History tells us that even a short disruption to the grains trade can have lasting effects. Jimmy Carter’s grain embargo against the Soviet Union in 1980 led to the emergence of new export hubs in South America and the Ukraine. The Brazilian soybean industry may have never had a better promoter than the current dispute.
No Tariffs on U.S. Crude
The price impact on crude oil has been less clear as a weakening global economic outlook and higher shale oil output is offset by OPEC production cuts and by increased geopolitical risk in the Middle East. The trade war may not be having a major impact on the price of oil so far, as China decided not to impose import tariffs on U.S. crude. Despite this, U.S. crude exports to China dropped to zero between August and October 2018, after which they recovered.
The country’s leaders are willing to use crude oil imports in the trade negotiations. For U.S. exporters, the good news is that Chinese demand for their products was replaced by higher imports from other Asian nations, notably South Korea. The fact that tariffs were not imposed possibly indicates that crude oil imports are simply too important to the Chinese economy. Unlike in soybeans, it does not have enough suppliers to easily replace U.S. product over long time periods.
U.S. Commodities exports to China – Crude oil and soybeans
source: U.S. Energy Information Administration, USDA
In the case of LNG, China decided to impose 25 percent tariffs, thereby targeting a nascent U.S. industry seeking to expand to new destinations. Assuming a solution to the current dispute, LNG flows from the Gulf Coast to China are likely to reduce the U.S. trade deficit, one of Trump’s main trade policy goals.
Steel, Copper Sliding
To protect local producers, tariffs on steel imports lifted the U.S. domestic price versus global benchmark values, again accentuating regional price differences. Despite the positive initial price reaction, steel prices have decreased over the past twelve months as the industry suffered from low demand – for example from the oil and gas sector.
Other industrial metals, such as copper, also slid as the trade war generated uncertainty and clouded the global economic outlook. Copper is a widely followed economic barometer.
Differing fortunes –Soybeans, WTI and U.S. HRC Steel (indexed to March 2018 = 100%)
Source: CME Group
The future direction of the trade war is unclear: there may be a sudden positive ending or, equally, there may be a further escalation.
Long Term Effects on Trade Flows
Commodity trade flows between Europe and the U.S. have not been significantly disrupted yet, but the EU could be the next target in a round of escalation. The longer the trade war continues, the more profound its effects will be: new trade relationships are formed, and global commodity flows are rerouted to other nations.
As in the case of U.S. steel, which is suffering from low demand, the second-order effects of the trade war are also just feeding through to the real economy. The differing fortunes of commodity asset classes and the increased regional price divergence show that the trade war is also creating trading opportunities.
Beyond commodities, FX markets may become the new frontline in the trade war between China and the U.S. The renminbi has been pegged just above the psychologically important line of 7 Yuan per U.S. dollar, and financial markets will continue to watch the currency closely. President Trump is already suggesting that the European Union and Japan are engaging in competitive devaluation of their currency. It is possible that currency markets will take center stage in the next phase of the global trade war.