RPT-COLUMN-Trump Blows Up Trade Complacency, Commodities to Feel Pain: Russell

(CNBC) – U.S. President Donald Trump has just given commodity markets a reminder that stormy waters can blow up quite quickly even if the voyage ahead was looking like smooth sailing.

Investors were becoming complacent with the idea that the U.S.-China trade dispute was heading toward an eminently sensible and mutually beneficial resolution before Trump’s latest Twitter outburst.

Trump tweeted on Sunday that he will raise U.S. tariffs on $200 billion worth of Chinese imports to 25 percent from 10 percent on Friday, and threatened to targets hundreds of billions of dollars more in trade.

His ire appears to be at what he termed the slow pace of progress in the trade talks and Chinese attempts to “renegotiate”.

Trump’s comments stand in contrast to the recent positive signals emanating from both the U.S. and Chinese camps that progress to end the tit-for-tat tariff war was being made and a deal was within sight.

There is a whole cottage industry of analysts dedicated to trying to understand Trump’s tactics and motivations, but possibly the most sensible method of dealing with the mercurial U.S. leader is to assume no progress and the worst outcome until proven otherwise.

The key question is how will Beijing respond to the latest outburst?

It’s unlikely that China’s leaders will want to be seen to be caving in front of threats by a bullying U.S. president, but at the same time they are also keen to reach an agreement that will alleviate some of the pressure on their export-led manufacturing sector.

Looking at the scenarios available it would seem the best outcome would be for virtually everybody to ignore Trump and continue to try and reach an acceptable deal.

The worst outcome would be for the United States to go ahead and raise tariffs this week, which would likely scupper the current negotiations and force Beijing to retaliate.

The problem for China is that relatively quickly they will run out of things to retaliate against, unless they are prepared to go nuclear and impose tariffs on the big ticket imports items such as aircraft.

The tactic that Beijing has followed so far in imposing relatively limited retaliatory tariffs, and mainly on goods that they could acquire with some degree of ease from other suppliers, hasn’t worked insofar as Washington clearly doesn’t feel the trade dispute is hurting the U.S. economy.

That judgement by the Trump administration that the U.S. is so far immune to those tariffs may be challenged in coming months if the early signs of slowing growth become more visible.

CHINA HOLDS OFF BUYING U.S. ENERGY

In the meantime, it’s likely that U.S. exporters of crude oil, coal and liquefied natural gas (LNG) will likely remain largely frozen out of the world’s biggest energy importer.

Growing exports of energy products from the United States to China were one of the few areas actually working to reduce the trade imbalance between the world’s two largest economies, at least until the trade dispute got going in earnest in the middle of last year.

Since then they have plummeted and have yet to recover in any significant way, with Refinitiv vessel-tracking and port data showing just four cargoes of crude oil have been delivered from the United States to China this year, down from 42 in the January to May period in 2018.

A smattering of coal cargoes have arrived in China from the United States so far this year, but this is also sharply down from levels before the trade dispute, while only three LNG cargoes have been imported this year, down from 23 in the first five months of 2018.

But the main threat to commodities is that the risk of a prolonged and escalating trade war has come into play, and this would be bearish across the board.

Brent crude futures offered an early verdict to Trump’s tweets, falling as low as $69.22 a barrel in early Asian trade, a drop of as much as 2.3 percent from Friday’s close.

Iron ore futures on the Dalian Commodity Exchange were also weaker at the start of the weak, dropping as low as 622.5 yuan ($92.50 a tonne) in early trade, a decline of 1.9 percent from the close on April 30.

The Dalian exchange was closed for three days last week because of the May Day holidays, and iron ore would likely have opened stronger on Monday given news of a drop in shipments from Brazil, the world’s second-biggest exporter of the steel-making ingredient.

Instead, investors are clearly fretting about the latest U.S.-China trade escalation.