Clash of Titans: US, China trade spat and its impact on commodities

(Moneycontrol) – Concerns over trade war between the world’s leading economies have resulted in wide swings in the global financial and commodity market.

The US imposed multi-million worth tariff on several goods being imported from China in the last week and the latter retaliated by levying a tariff on American products.

The US administration levied tariffs on metal imports from Europe, Canada, and Mexico too.

US President Donald Trump laid the stones for the trade war by imposing tariffs on Chinese products, claiming that the country unfairly transfers American technology and intellectual property that are alarming for American jobs. American exports to China that will be most affected by the tariff are vehicles, aircraft, vegetables, plastics, and chemicals.

Meanwhile, heavy equipment like machinery, mechanical appliance, and electrical goods are likely to be affected on the Chinese side. In the meantime, the US business community is against the decision to impose trade tariffs.

Washington’s largest lobbying groups have already warned that the proposal to impose tariffs would destruct U.S manufacturers, farmers, and consumers.

IMF too has warned that trade war would lead to losses on both sides and will leave a severe impact on the economy, though the two countries continued challenging each other.

The trade war worries were initially triggered in March after the US planned to impose tariffs on steel and aluminium imports. However, global commodity prices had a mixed response to the news.

Steel prices weakened initially, but strongly recovered later, especially in the key Chinese market. On the domestic side, tariff impact on domestic steel manufacturers was limited as our exports to the US is negligible.

The US import steel largely from Canada and Brazil. At the same time, wide swings were seen in global Aluminium prices. The same trend was seen in other base metals as well.

Bullion reacted positively towards the news due to its safe-haven appeal. However, prices corrected later on reports of subsiding worries, a strong dollar, and the US FOMC meeting outcome.

The already elevated crude oil prices had a muted immediate response, continuing its positive momentum. However, oil prices retreated from the multi-month peaks later and are now consolidating with looming worries over the possibility of China imposing tariffs on US crude oil as well as the outcome of OPEC bi-annual meeting.

China has now proposed to limit the import of US energy products like Crude oil, LNG, and coal. China is the largest customer of US crude, importing about 319,000 bpd since January.

The country is the priority customer for ballooning US shale industry. Blocking US oil to China will create trouble for the US shale producers as it is difficult to find new customers.

China can sources oil and energy products from other countries like Russia and Saudi even though they had to pay more.

The US dollar gathering momentum after the imposition of tariffs to affected the commodity prices. The greenback rose more than seven percent after the US administration’s decision to impose tariffs on imports. A strong dollar usually makes commodity price feeble.

Looking ahead, the tensions may flare up further as the US plan to restrict Chinese investments into the country. Various reports suggest that the US plans is planning to expand tariff on more Chinese goods in the coming days.

As long as worries over trade spat between the counties exist, commodity prices likely to be vulnerable, with the US and China being the top global economies and leading consumers of a large number of commodities.