US-China trade truce fails to brighten up commodities

Updated on: Oct 14, 2019
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In keeping with the general expectation that a major breakthrough was improbable in the trade talks between the US and China held last week, the two countries did not come to any comprehensive agreement, but only a partial one. In other words, the two sides agreed to have a comprehensive agreement going forward.

No wonder, the global commodity markets have reacted in a muted fashion. If anything, the statement from the American side appears to be upbeat about the prospect of a positive outcome sooner rather than later. However, statements from the Chinese side do not refer to any agreement, even if partial, but to only positive discussions. This has left the market participants somewhat flummoxed.

Yet, there is hope that the positive sentiment on both sides will soon translate into a concrete agreement. On its part, China has expressed willingness to buy American agricultural commodities on a large scale. The value indicated is $50 billion. The two important agri-commodities supplied by the US to China are soyabean and cotton.

The US has agreed not to implement the punitive tariffs on Chinese goods that were to come into effect this week. Also, according to reports, both have agreed to discuss highly contentious issues including intellectual property rights and currency.

So, at the start of the new week, commodities markets covering energy, metals and agriculture continue to remain subdued. One sector that could have significantly benefited in the event of a positive outcome in the trade talks is the industrial metals sector. However, that is not to be, at least for the time being. Copper continues to trade around $5,800 a ton, while aluminium trades at $1,720/tonne. Zinc is priced at $2,400/tonne, levels not significantly different from recent trading ranges for each of the metals.

One commodity that has seen some positive price traction is soyabean. Without doubt, it is the most important export from the US to China for long years and has benefited large number of growers in the US Midwest. After trade tensions escalated and China substantially reduced its import of US-origin soyabean, growers were upset with the fall in domestic prices. The US administration had to announce compensatory payment to growers as a palliative measure.

The Midwest growers will now have reason to cheer as the prices on the exchange have begun to move up. But there may be another reason too for the upward price movement. The US soyabean harvest is expected to be multi-year low, falling below 110 million tonnes this year from 130 m t in 2018-19.

So, it is possible, tightening supplies and promising export demand together will propel the bean rates higher.

No impact on energy sector

The trade talks have not had any perceptible impact on the energy market. If anything, Brent has dropped below $60 a barrel, and WTI $54 a barrel. The energy market participants perceive the talks as not going far enough, an expert remarked. Last week, the International Energy Agency announced a downward revision of its forecast for global oil demand this year and the next by 100,000 barrels per day in each case.

The gold market, which is often quick to react to geopolitical developments, showed volatility late last week; but is currently trading a tad below the psychologically important level of $1,500 a troy ounce. There is belief that the market will now focus attention on Brexit as the deadline nears.

Given that the physical demand conditions are rather enervated in both China and India, the yellow metal is likely to face huge resistance at higher levels. If anything, gold may slide towards the $ 1,450/oz levels.

The author is a policy commentator and commodities market specialist. Views are personal

Published on October 14, 2019

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