Metals, energy lead downturn in commodities as trade war intensifies

Withdrawal of GSP benefits to India, Japan and other nations by the US has had a trickle-down effect; copper and zinc have shed over 10% since May, crude oil and thermal coal are down 13%

The fresh round of the US-China trade spat, and its expansion by America to several other nations has hit industrial commodities the most. US had imposed hefty duties on Chinese imports, raising fears of an economic slowdown. China's subsequent response to the US move has only worsened the scene.

Commodities have been falling since the beginning of the current financial year, but the trade war exacerbated the sharp decline in prices May onwards. Most commodities are down 5-15 per cent, with copper and zinc having shed over 10 per cent, and crude oil and thermal coal down more than 13 per cent.

The United States last week withdrew the generalised system of preference benefits, under which goods from countries such as India and Japan enjoyed lower duties, giving them access to American markets. Its rationale was that these countries haven't responded in spirit by granting benefits to goods imported from the US. This has worsened sentiment in the global markets as the US move signals an expansion in the trade war, which is likely to slow down economic growth and the hence demand for commodities.

Brent crude lost sharply the past two weeks and is down 20 per cent form its peak. Ajay Kedia, Director, Kedia Commodities says that a firming rupee has further weakened commodity prices in India. “Crude slips to a near 4-month low to trade below Rs 3,700 levels on MCX on rupee firmness, as the US-China trade war and threats of tariffs on Mexico would diminish global crude demand. US oil output was soaring at 12.3 million barrels per day (mbpd) at the end of May, versus 11.11 mbpd produced in Russia and 9.65 mbpd pumped out of Saudi Arabia. But now prices are technically in the oversold zone, so technically they can see some bounce,” he explains. But he also expects the Opec along with Russia, following a meeting this month end, would continue limiting global crude supplies in order to avoid a surplus. That could arrest the fall in prices.

While metals, crude oil, coal and steel are all falling, iron ore has been is rising on continued scarcity following mine closure in Brazil a few months ago. Even cotton prices have fallen in the international market due to the trade war and the International Cotton Advisory Committee’s projection of increased in global stock.

Thermal coal prices are down because natural gas is emerging as an alternative for power plants, reducing demand for thermal coal.

Anuj Gupta, DVP Research commodities and currencies, Angel Broking, says, “All over the world in agri and in non-agri commodities, prices have fallen due to a worsening trade war. Along with tariff increase, the US-China spat, America's move to also cancell GSP (Generalized system of preferences, under US Trade Act 1974) benefits to India and other countries will put downward pressure on global commodity prices.”

Gold prices, which remained weak along with other commodities, have rebounded the past few days from $1,280 an ounce a month ago to $1,325 currently. in Mumbai, during the past four days prices are up by over Rs 800 per 10 grams. Today, standard gold in the Mumbai spot market closed at Rs 32,414 per 10 grams.