NEW YORK/ WASHINGTON
The US-China trade war is sparking so much fear over demand that even those parts of the commodity world that aren’t in the direct firing line are getting burnt. Oil had its biggest sell-off in four years Thursday after US President Donald Trump brought an abrupt end to a truce forged with Chinese counterpart Xi Jinping in June. That’s even though Beijing has spared crude from levies. Meanwhile, crop markets, industrial metals and shares of agricultural traders already roiled by the year-long tit-for-tat tariff spat got another whipping.
That shows how the dispute between the two major economies is overwhelming concerns over supply: tensions in the Middle East’s most important oil chokepoint are still simmering, the wettest 12 months of record disrupted planting in the US crop belt and a deadly pig virus is decimating hogs in China. For investors, the threat posed by the trade war to global economic health and in turn, consumption of commodities is trumping everything else. Trump announced that he would impose a 10 per cent tariff on a further $300 billion in Chinese imports, including smartphones, laptops and children’s clothing, from Sept. 1.
Beijing has vowed to respond. That sent the Bloomberg Commodity Index, which measures returns from raw materials including oil, corn and copper, 2.5 per cent lower the most in over a year. It was little changed, and down almost 2 per cent on the week. If implemented, we believe this new round of tariffs will have a more significant impact on the US economy compared with the previous tariffs, TD Securities said in an Aug. 1 report.
This is because the size of the impacted imports is larger and the composition of these imports is more consumer goods oriented. It estimates a negative impact of 0.10-0.14 percentage points on growth if the levies are applied. While the new levies may have limited direct impact on industrial metals, the repercussions for the economy in China, the world’s biggest metals consumer, will be significant, according to Jiang Hang, vice president of the trading division at Jinchuanmaike Metal Resources Co. in Shanghai. Copper on the London Metal Exchange slumped 2.9 per cent on its way to the worst week since August 2018. Nickel, lead and tin also fell.
In agricultural markets, cotton and sugar declined, while crop markets slumped for the week, during which wheat, corn and soybean futures fell to the lowest levels in months. Archer-Daniels-Midland Co., one of the world’s biggest grains traders, is stepping up a cost-cutting drive to fight thin industry margins as a resolution to the US-China dispute takes longer than it expected. Rivals Bunge Ltd. and Cargill Inc. have also been affected.
And while an outbreak of African swine fever in China has resulted in the death of millions of hogs, prompting expectations for record meat shipments to the nation, purchases of US meat have lagged behind other countries such as Brazil due to tariffs that made American imports too expensive. American hog futures dropped about 17 per cent on the week — the most since July last year.
US benchmark West Texas Intermediate and global market Brent crude slumped over 7 per cent on Thursday after Trump tweeted his tariff threat. Tensions in the Middle East have done little to boost prices. Over the past six weeks, Iran has brought down an American spy drone and seized a British tanker, all the while reeling from a US sanctions campaign that has slashed its oil sales to the lowest since the 1980s. While prices rebounded Friday, they declined on the week.
Meanwhile, US President Donald Trump said on Saturday that things are going well with China, insisting US consumers are not paying for import taxes he has imposed on goods from that country although economists say Americans are footing the bill.
Things are going along very well with China. They are paying us Tens of Billions of Dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going. So far our consumer is paying nothing – and no inflation. No help from Fed! Trump said on Twitter.
He also said without presenting evidence – that countries are asking to negotiate REAL trade deals, saying on Twitter, They don’t want to be targeted for Tariffs by the US. Trump abruptly decided on Thursday to slap 10% tariffs $300 billion (246.8 billion pounds) in Chinese imports, stunning financial markets and ending a month-long trade truce.
Tariffs are intended to make foreign goods more expensive to boost domestic producers, unless international exporters reduce prices. But there has been no evidence that China is cutting prices to accommodate Trump’s tariffs. A study published by the National Bureau of Economic research in March found that all of the cost of tariffs imposed in 2018 were passed on to U.S. consumers.