Trump's tariff threat to China pulls down global commodity prices

Jitters already felt in crude, farm goods and base metals; US aims at heart of chinese economy; Beijing's retaliation could have tailspin effect on global trade

Prices of industrial, farm and energy commodities declined sharply on Monday, amid fears of resumption of the global trade war, after United States president Donald Trump talked of raising tariffs sharply on Chinese goods this week and derailed trade talks between the world’s two largest economies. Commodity prices had fallen sharply last Friday as well.

After hitting a month's low of $68.79 a barrel, Brent crude recovered marginally to trade at $69.78 a barrel on Monday. US West Texas Intermediate (WTI) crude futures declined by $1.11 to trade at $60.83 a barrel in the opening session. Apart from globally traded agricultural goods, industrial commodities, including base metals followed suit and declined by about one per cent on the Shanghai Futures Exchange other global exchanges today.

Precious metals should have risen in view of accelerated global economic risk following trade war fears but that didn’t happen. 

The increase in tariff by the US hurts China’s economy where it hurts most, as it would either make Chinese goods more expensive and, therefore uncompetitive, or force manufacturers in that country to pare factory costs drastically. This, in turn, would have a tailspin effect on global commodities, of which China is the world's largest importer.

Experts, however, believe that commodities with strong fundamentals would bounce back in the near term on investors’ shift from overvalued equity markets. Commodity prices have remained subdued globally for a fairly long time despite strong fundamentals. The fall in energy prices was largely dominated by the US non-farm payroll data released on Friday.

“The renewed fear of a tariff war between the United States and China has created uncertainty in the market again, resulting in a decline in commodity prices,” said Naveen Mathur, Director, Anand Rathi Shares and Stockbrokers Ltd.

The fall, which started in the beginning of the month, persists till date on the Multi Commodities Exchange of India (MCX). Crude oil prices have reported a decline of 4.7 per cent so far this month to trade at Rs 4,252 a barrel on Monday. Copper futures for near-month delivery shed 3.8 per cent to Rs 433 a kg.

“With global economies under pressure, the new round of US tariff on China would create more negativity in the market, and would  impact consumption. There's a sense among investors that the equity market has been overvalued, and investors could possible shift from stocks equity to safe-haven asset classes. Investors may take a bet in gold and cotton,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

President Trump tweeted on Sunday that his administration would hike tariffs on Chinese goods this week, sparking fears of retaliation by Beijing. Trump’s twitter message also indicates talks between the US and China for easing the trade war have got derailed.

If imposed, goods worth $200 billion imported from China to the US would suffer a fresh hike in import duty, raising fears of repercussion on global demand and supply of such goods. Industrial commodities and textile products. among others are likely to be hit with new US tariffs. In retaliation, China may curb imports of soybean and cotton from the US and buy these items from alternate sources.

“The escalating trade war news is expected to have a negative impact on the base metal complex going forward. Copper and nickel may be exceptions as there is a mismatch between supply and demand favouring price rise. Overall, we expect to see increased volatility going forward,” said Pritam Patnaik, Business Head, Reliance Commodities Ltd.