After last month’s setback, global stock markets began March with renewed jitters. The culprit this time was President Trump’s threatened tariffs of 25% on imports of steel and 10% on imported aluminium. The news alarmed investors, who fear the move will spark retaliatory measures from China and other major producers that could escalate into a full-blown trade war.
The commodities markets are also concerned. As China is the fastest-growing market for US crude oil, liquefied natural gas (LNG), propane and also agricultural, forestry and fishery products, the consequences of a trade war would go way beyond base metals.
As analysts have noted, back in 2002 Trump’s predecessor George W Bush attempted a similar policy when he imposed tariffs of up to 30% on imported steel. Bush’s policy lasted for 20 months and sparked complaints to the World Trade Organisation that the US had violated international trade
Overcapacity of steel has been a global problem for several decades and as previously, any protectionist move by the US is likely to trigger retaliatory measures. European Commission president Jean-Claude Juncker has already spoken of tit-for-tat tariffs on US products, from Florida oranges and Kentucky bourbon to Levi’s blue jeans and Harley-Davidson motorbikes.
Oil and US ambitions
While steel is currently the centre of attention, precious metals and oil have traditionally been the commodities most likely to move markets. Rising prices benefit producers, with more than half of Australia’s annual revenue coming from iron ore, gas and other commodities, but negatively impact others.
High oil prices, for example, is bad news for industries ranging from plastics manufacturers to airlines and other fleet operators. Commodity price charts reflect demand for oil from emerging industrial markets such as China, India and Latin America.
Two oil price spikes in the Seventies caused by geopolitical conflict shook the world and the major economies of the West. It furthered the cause of American energy independence and the US has become the world’s third-largest producer of crude oil after Saudi Arabia and Russia and is second only to Russia as an exporter of refined products.
The sharp fall in oil prices that occurred from mid-2014 onwards partly reflected growing US output. This was coupled with flat demand in much of the world as economic growth weakened in the wake of the global financial crisis and the reluctance of the major oil producer’s cartel, Opec, not to cut back its own production to bolster prices.
Lower oil prices also resulted in subdued inflation – and even brief deflation – in much of the world and a severe temporary dent in Russia’s economic growth.
The commodity market live has generally seen softer prices this month, although the global scenario for 2018 is still good with oil prices edging modestly higher. However, further ahead risk analytics group Verisk Maplecroft foresees clouds on the horizon.
Over the next three years, it expects the stability of many producing countries with flows of upstream oil and gas investment to worsen. Chief among these are Russia, Kazakhstan, Egypt, Uganda, Kenya and Ecuador. Also at risk of deteriorating political stability are Algeria, Vietnam and Colombia.
“We don’t see increasing instability necessarily ending in coups or significant political upheaval, but a less predictable above-ground-risk environment is likely to emerge,” says head of financial risk at Verisk Maplecroft, James Lockhart-Smith.
Crops and stability
Corn and soybeans has so far attracted less attention, but drought conditions in South America are fast eating into global reserves of both commodities. Poor growing conditions in Argentina, the world’s third-largest producer of both crops, have exacerbated the impact of dry weather in the US Plains states and South Africa.
With Argentina’s regional economy suffering, the country’s recovery from recession could be set back. After a -2.2% contraction in 2016, good wheat and corn production helped propel growth of 2.8% last year and early estimates for 2018 had pencilled-in a figure of 3%-plus. The drought also undermines the policies of Argentina’s president Mauricio Macri, who has either abolished or lowered tax on exported crops since taking office two years ago.
However, the misfortunes of Argentina’s farmers are to the benefit of their peers in the US Midwest, who are releasing their stores of grain to take advantage of rising prices.
Food security is recognised as being closely linked to political stability. The conflict that has raged in Syria since 2011 was triggered in part by several years of intense drought that saw agricultural production slump, a mass migration from the country’s rural areas to the cities and previously wealthy farmers become dependent as the country was forced to import basic crops.