cmdtyInsights Weekly Commodity Market Report
CRB - Commodity Research Bureau - CRB - Fri Jul 13, 12:02AM CDT

Trade situation quickly deteriorates and forces commodity prices to a new 10-month low

The Bloomberg Commodity Index has plunged by -9% in the past seven weeks and fell to a new 10-month low this week.

Trade tensions are the main cause of the commodity rout, along with concern that the Chinese economy is losing momentum and confidence.

The U.S. and China last Friday implemented reciprocal 25% tariffs on $34 billion of goods and the Chinese tariff hit most of the U.S. agriculture sector including soybeans. Then this Tuesday, President Trump announced that he plans to impose a 10% tariff on another $200 billion of Chinese products when the public comment period concludes on August 30. The U.S. government is also conducting the necessary procedures to execute President Trump’s threat to levy a 25% tariff on all U.S. auto imports and/or a 20% tariff on U.S. imports of European autos.

The markets are concerned about the fast pace at which the U.S. trade war is accelerating. The U.S. has so far imposed tariffs on about $85 billion of U.S. imports, which accounts for only 3.6% of overall U.S. imports. However, the impact of that $20 billion tariff/tax hike is exacerbated by the fact that U.S. trade partners have so far retaliated against $56 billion worth of U.S. exports, which will put a dent in U.S. exports and GDP growth.

While the current situation is manageable at a macro level, U.S. tariffs on another $200 billion of Chinese goods and U.S. tariffs on autos would take the trade war to a new and more dangerous level. U.S. tariffs on $250 billion worth of Chinese goods represent about 2.0% of China’s GDP and is likely to cause a hit of at least 0.3-0.4 points to China’s GDP growth.

Needless to say, commodity prices are highly sensitive to fluctuations in the Chinese economy. The recent plunge in industrial metals prices illustrates the degree of concern about slower Chinese and world economic growth. In fact, July copper prices since mid-June have plunged by 18% to a new 1-year low.

The U.S. ag sector has already been seriously injured by the retaliatory tariffs placed on the U.S. ag sector by China and by other countries such as Canada, Mexico and Europe as retaliation for the U.S. steel and aluminium tariffs. Soybean prices have taken a particularly hard hit since the 25% Chinese tariff is likely to cause Chinese purchases of U.S. soybeans to plunge by more than half.

Moreover, trade tensions look set to worsen since none of America’s trading partners seem inclined to negotiate and are focused mainly on retaliation. That has prompted President Trump to raise the stakes very quickly. The trade situation may continue to deteriorate until the world’s politicians eventually get a wake-up call from a plunge in the global stock markets. Politicians aren’t paying much attention to the sharp sell-off in commodity prices, but they will be forced to pay more attention if stocks plunge.