The global industrial metals market continues to be rattled by the ongoing trade dispute between the world’s two largest economies — the US and China. The two are currently engaged in a war of tariffs and retaliatory counter-tariffs. The dispute is seen having a negative impact on the sentiments in the base metals market and weighing heavily on prices.

Prices are under downward pressure as evidenced by copper trading at less than $6,000 a tonne on May 31 and aluminium at about $1,760/t. Worsening the sombre mood was China’s latest official PMI (Purchasing Managers Index) for manufacturing which came as a disappointment to the market. The data indicate contraction and are likely to rekindle concerns over the state of the Chinese economy. This does not bode well for the base metals complex.

China also shot the latest salvo in the ongoing trade war by threatening to limit the export of rare earth elements to the US. Rare earths are critical for a variety of modern industries including electronic goods, smart phones, wind turbines, electric vehicles and military applications (radar, missile guidance systems). They are not easily substitutable.

Rare earth metals are available in low concentration and are confined to a few regions of the world. China is the dominant producer, accounting for three-fourths of the world production, while the US is a large importer-consumer. China’s threat has stirred the otherwise quiet market for rare earth metals.

Side effects

An unintended consequence of this Chinese threat is that tin prices have come under pressure. Tin is widely used in the electronics sector. Any disruption to the supply of rare earth elements will hit the electronic sector and thereby hit demand for tin, too.

Zinc is under pressure more because of a rise in mine production which is starting to reflect in refined production, too, while aluminium has been dragged down because of market fundamentals. However, a recent closure of six million tonnes of refining capacity in China may provide some respite.

Steel — the most important industrial metal — too, faces the heat of the trade dispute. Actually, steel-makers face a double whammy. On the one hand, they have to battle global overcapacity combined with rising iron-ore prices due to tighter availability, and on the other, face sluggish demand because of economic slowdown across geographies. Producers are now scaling down output.

It is in such a scenario that market participants have to brace for the second half of this year which can prove to be even more challenging. While growth in Europe and Japan is tepid, China’s growth momentum is faltering. Add to this the risk of a US slowdown in the second half of the year, and the global picture turns scary.

The crude oil market, despite current supply tightness, has taken cognizance of this emerging scenario, and prices have moved down to mid-$60s a barrel, despite dire predictions to the contrary by experts.

China, the world’s mover and shaker of the industrial metals market, may provide a saving grace though. There is strong expectation that the Chinese government will announce further measures to stimulate the economy. How soon and in what measure the stimulus package will come is anybody’s guess. Similarly, rumours of a rate cut by the US Federal Reserve, possibly in the last quarter of this year or early 2020, are doing the rounds.

In other words, in the present climate of uncertainty and risks triggered by weak growth and trade tensions, the industrial metals market is unlikely to register any significant advances in the near future. The market will remain unsettled. To be sure, there are no signals on the horizon that the trade dispute will ease off or the economic outlook will improve any time soon.

The writer is a policy commentator and a commodities market specialist

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