Overall Commodity Prices In Flux Amid Looming Trade Tariffs



U.S. President Donald Trump’s decision to impose tariffs on aluminium and steel imports on 1 March heavily dragged on the prices of some base and some precious metals in March, eroding investor confidence globally. Trump declared a temporary exemption for some economies, including Canada and the European Union, but left the levies for China in place, making it clear that China was the focus of his actions. This negative climate was amplified later in the month by Trump’s announcement of tariffs on USD 50 billion of Chinese imports in response for what he called China’s unfair trade practices, which have led to massive trade surpluses in favor of the Asian nation. China retaliated by announcing a reciprocal tariff package on U.S. imports including soybeans, planes and automobiles. Against this backdrop, commodity prices fell an aggregated 1.9% month-on-month in March (February: +0.8% month-on- month), the sharpest drop in one year. Base metals, along with palladium and platinum, were the main drivers behind March’s poor performance. Energy prices rose in March, however, due to strong fundamentals. Similarly, healthy global demand and fears of limited supply continued to boost prices for agricultural commodities. Global commodity prices are expected to withstand ongoing political uncertainties this year and next. Chinese officials adopted a more conciliatory tone in recent days, signaling a potential end to the ongoing trade war with the U.S. Moreover, data for Q1 confirms that the global economy remains in good shape, shoring up demand for commodities. Nevertheless, Trump’s aggressive stance toward China remains firmly in place, and he has threatened the country with additional tariffs of up to USD 150 billion. While China has offered to open some economic sectors, it has also stated that the country will retaliate against any punitive measure. If these threats materialize, the global economy will face an all-out trade war between the two countries, which would certainly disrupt global growth and commodity markets.
From Focus-Economics

ENERGY | Strong fundamentals prompt prices to recover In March, energy prices recovered some of the ground lost in the previous month, when oil prices tumbled in the wake of the massive sell-off in U.S. equity markets. 3 April 2018 oil markets were oversupplied. Energy prices rose 1.4% month- on-month in March (February: -4.2% mom). The all-important Brent and WTI oil prices climbed in March amid the strong compliance level to the oil-cap deal by Russia and OPEC members, along with signs of strong global growth and rising geopolitical tensions in the Middle East. Gasoline prices surged in March, reflecting higher oil prices and strong demand. In turn, natural gas prices benefited from China’s environmental push, posting solid gains in March. Conversely, China’s decision to allow higher coal production put downward pressure on thermal coal prices. Strong global growth will continue to spur energy prices this year. That said, the rise will be limited by increasing production of shale oil and natural gas prices in the U.S. Moreover, stricter environmental regulation in China and a broader preference for cleaner energy globally will dampen demand for coal. Analysts surveyed by FocusEconomics expect energy commodity prices to rise 8.1% year-on-year in Q4 2018 before logging a mild decline of 0.5% in Q4 2019.

BASE METALS | China-U.S. trade tensions lead prices to decline Prices for base metals logged their worst performance in over two years in March amid fears that the ongoing trade war between China and the United States could derail the current stellar global economic growth. Base metals declined 3.4% month-on-month, contrasting February’s mild 0.9% increase. Prices for base metals struggled in March on the back of concerns about the impact on global economic growth of the trade rift between China and the U.S. Iron ore, a key input for steel, was particularly hit by Trump’s announcement to impose tariffs on steel and aluminium imports on 1 March. Aluminium prices were also sharply down as reduced U.S. imports for the metal are expected to increase global oversupply and lower non-U.S. prices. Almost all the remaining base metal prices tracked by FocusEconomics were down in March, reflecting a potential slowdown in China due to the trade dispute with the U.S. Half of most metals that are used in industrial processes are consumed by China. On the flip side, U.S. steel prices soared in March; reduced global imports for the metal will tighten the domestic steel market. Analysts polled by FocusEconomics still see increasing base metal prices in 2018 and 2019 amid signs that China and the United States are willing to negotiate to end trade disputes. Analysts foresee base metal prices rising 2.0% in Q4 2018 from the same quarter in 2017. Base metal prices should lose some steam in 2019, with a year-on-year expansion of 1.9% penciled in for Q4 2019.


PRECIOUS METALS | Geopolitical risks and Fed’s tightening cycle send prices down Prices for precious metals declined for the second consecutive month in March, with all commodities in the group recording lower Change in Base Metals Forecasts. Precious metal prices fell 0.8% on a month-on-month basis in March (February: -0.3% mom). Palladium and platinum prices were the worst performers in the category. Fears that the trade rift between China and the U.S. could hurt economic growth and reduce global demand for cars weighed on prices for the two commodities. Gold prices were negatively affected by the ongoing monetary tightening in the United States and expensive equity valuations. That said, ongoing trade disputes between China and the U.S., a conflict escalation in Syria and rising tension between Russia and Western nations are all expected to fuel demand for the safe-haven asset. Silver prices largely followed gold’s performance and declined slightly in March. Strong global economic activity and limited supply growth should spur industrial demand for palladium, platinum and silver this year and next, supporting prices for the three commodities. Moreover, heightened geopolitical tensions bode well for gold and, to a lesser extent, silver prices. An expected uptick in purchases of jewelry and bullion, especially in China, will add further upward pressure on precious metal prices. Analysts polled for this month’s survey see precious metal prices for Q4 2018 rising 3.3% from the same quarter in 2017. The panel sees a mild deceleration next year, with precious metal prices increasing 3.2% year-on-year in Q4 2019.

AGRICULTURAL | Prices continue to rise on strong demand and shortage fears The upward trend in agricultural prices continued in March on weather supply concerns and resilient demand for industrial usages, food supplies and animal feed. That said, the rally is expected to moderate going forward due to improved weather conditions in key producing areas such as Western Africa and parts of the United States. Moreover, investors will likely take advantage of the recent surge in some agriculture prices. Agriculture prices grew 3.9% on a month-on-month basis in March (February: +5.1% mom). Five out of the nine agriculture commodities tracked by FocusEconomics saw price increases in March, with cocoa recording the largest increase, followed by cotton. Conversely, prices for coffee and wool declined in the month. Sugar prices continued to decline in March amid oversupply. Supply shortages and healthy demand for agriculture products will continue to exert upward pressure further down the road. Our panel of analysts forecasts a 16.5% annual increase in Q4 2018. Agriculture prices are seen expanding a solid 4.5% year-on-year in Q4 2019.