Never-Ending Trade War Sinks Commodities Into a World of Trouble

(Bloomberg) --

The U.S.-China trade war is sparking so much fear over demand that even those parts of the commodity world that aren't in the direct firing line are getting burned.

Oil had its biggest sell-off in four years Thursday after U.S. President Donald Trump brought an abrupt end to a truce forged with Chinese counterpart Xi Jinping in June. That's even though Beijing has spared crude from levies. Meanwhile, crop markets, industrial metals and shares of agricultural traders -- already roiled by the year-long tit-for-tat tariff spat -- got another whipping.

That shows how the dispute between the two major economies is overwhelming concerns over supply: tensions in the Middle East's most important oil chokepoint are still simmering, the wettest 12 months of record disrupted planting in the U.S. crop belt and a deadly pig virus is decimating hogs in China. For investors, the threat posed by the trade war to global economic health -- and in turn, consumption of commodities -- is trumping everything else.

Trump announced Thursday that he would impose a 10% tariff on a further $300 billion in Chinese imports, including smart-phones, laptops and children's clothing, from Sept. 1. Beijing has vowed to respond. That sent the Bloomberg Commodity Index, which measures returns from raw materials including oil, corn and copper, 2.5% lower -- the most in over a year. It was little changed Friday, and down almost 2% on the week.

U.S. Consumer Back in Firing Line With Trump's China Move

“If implemented, we believe this new round of tariffs will have a more significant impact on the U.S. economy compared with the previous tariffs,” TD Securities said in an Aug. 1 report. “This is because the size of the impacted imports is larger and the composition of these imports is more consumer goods oriented.” It estimates a negative impact of 0.10-0.14 percentage points on growth if the levies are applied.

Economic Repercussions

While the new levies may have limited direct impact on industrial metals, the repercussions for the economy in China, the world's biggest metals consumer, will be significant, according to Jiang Hang, vice president of the trading division at Jinchuanmaike Metal Resources Co. in Shanghai. Copper on the London Metal Exchange slumped 2.9% on Friday on its way to the worst week since August 2018. Nickel, lead and tin also fell.

In agricultural markets, cotton and sugar declined, while crop markets slumped for the week, during which wheat, corn and soybean futures fell to the lowest levels in months. Archer-Daniels-Midland Co., one of the world's biggest grains traders, is stepping up a cost-cutting drive to fight thin industry margins as a resolution to the U.S.-China dispute takes longer than it expected. Rivals Bunge Ltd. and Cargill Inc. have also been affected.

And while an outbreak of African swine fever in China has resulted in the death of millions of hogs, prompting expectations for record meat shipments to the nation, purchases of U.S. meat have lagged behind other countries such as Brazil due to tariffs that made American imports too expensive. American hog futures dropped about 17% on the week -- the most since July last year.

Also read: Brutal 48 Hours for Stock Traders Caught in Trump-Powell Squeeze

U.S. benchmark West Texas Intermediate and global market Brent crude slumped over 7% on Thursday after Trump tweeted his tariff threat. Tensions in the Middle East have done little to boost prices. Over the past six weeks, Iran has brought down an American spy drone and seized a British tanker, all the while reeling from a U.S. sanctions campaign that has slashed its oil sales to the lowest since the 1980s. While prices rebounded Friday, they declined on the week.

--With assistance from Winnie Zhu, Isis Almeida, Grant Smith, Dan Murtaugh and Michael Hirtzer.

To contact the reporter on this story: Pratish Narayanan in New York at pnarayanan9@bloomberg.net

To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net, Millie Munshi, Carlos Caminada

©2019 Bloomberg L.P.