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Will the Trade Deal Help Commodities?

Part One of the US-China trade deal has been signed. It’s a strange thing but there didn’t seem to be much coverage of this temporary ceasing of US-China trade hostilities? At this point, I can’t resist making an observation that some may view as political, but it is just an observation that – given the mainstream media’s lack of coverage of this event, I actually had to Google this to be sure it had happened at all! In Googling the story I also discovered that the majority of those mainstream media stories that I could find were not focused on what the trade deal provided for but rather what it did not and, in several instances, the media stories were aimed at belittling the deal in the sense of China couldn’t possibly buy that much from the US and that there is as yet no evidence it is buying… Is it just me that finds this strange?

Anyway, yesterday China announced that its economy grew 6.1%, in line with expectations. According to one article by CNBC quoting largely Reuters sources,

China said Friday its economy grew by 6.1% in 2019, meeting expectations even amid a trade dispute with the U.S. Analysts polled by Reuters had expected China’s economy to have grown 6.1% in 2019, compared with 6.6% in 2018. Still, China’s GDP growth last year was the slowest since 1990, according to Reuters records. Although Beijing’s official GDP figures are tracked as an indicator of the health of the world’s second-largest economy, many outside experts have long expressed skepticism about the veracity of China’s reports. Beijing’sofficial growth target for 2019 was 6% to 6.5%, but Chinese Vice Premier Liu He said on Wednesday that GDP growth in 2019 was estimated to have grown more than 6%, Reuters reported.

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The Phase One trade deal has apparently helped with optimism around Chinese demand and economy with Chaoping Zhu, global market strategist at JP Morgan Asset Management quoted in the same article as saying “The uncertainties faced by corporates are diminishing along with the progress in US-China trade negotiation since December. Although the US government maintained most of the tariffs on Chinese products, the signing of the phase-one trade deal is a signal that the situation is unlikely to deteriorate. Against this background, corporate confidence keeps improving in the recent months.”  Analysts at Bloomberg however pointed to issues beyond the phase one trade deal saying “Stronger-than-expected activity in December points to further stabilization in early 2020. The signing of the ‘phase-one’ trade deal takes China out of the most turbulent waters, but it will hardly be smooth sailing ahead — sizable U.S. tariffs will continue to weigh on the external sector, and sentiment is weak.

The Phase One deal is a pause essentially in the trade dispute as China pledged to buy more US goods and the US cancelled additional tariffs on Chinese goods, among other things.  The deal has China promising to increase purchases of US products and services by an additional $200bn over the next two years and stops any new tariffs, it leaves in place most of the existing tariffs on $360bn worth of Chinese products and Chinese tariffs on more than $100bn in US goods. The $200bn includes a comittment to ‘try’ to buy $40bn in US agricultural products annually over the next two years “based on market conditions.” Reuters recently offered its analysis on impacted commodities as follows;

“Before the Dec. 15, 2019, deal, U.S. corn, sorghum, wheat, undenatured ethanol and refined copper cathodes had faced an additional tariff of 10% on shipments to China. Propane, cotton, aluminum scrap, copper scrap and rare earth magnets were all set for an additional 5% duty.

Below is a list and timeline showing how China’s tariffs on key U.S. commodities and energy items stand after the Phase 1 accord.

CRUDE OIL

China imposed a 5% tariff on U.S. crude oil shipments from Sept. 1, 2019, the first time U.S. oil had been targeted since the trade war between started more than a year ago. The 5% tariff was not affected by the Phase 1 deal.

China, the world’s biggest crude importer, has cut U.S. shipments from a record high in 2018. Chinese customs data showed imports in the first 11 months of 2019 fell by nearly half year-on-year to 6.35 million tonnes. Full year imports by origin will be available at the end of January.

PROPANE

China already removed an additional 5% tariff on U.S. propane shipments that was set to take effect from Dec. 1, 2019. A 25% duty that China imposed on U.S. propane on Aug. 23, 2018, has remained in place. No new waivers came into effect on Jan 15.

Chinese firms process U.S. propane into petrochemicals such as propylene. Imports in 2018 were worth an estimated $2 billion. The punitive tariffs nearly killed the business in the first 11 months of 2019, with imports from the U.S. at 2,443 tonnes.

LIQUEFIED NATURAL GAS (LNG)

China imposed a 10% punitive tariff on U.S. LNG shipments in September 2018, raising it to 25% in June 2019. LNG duties were not affected by the Jan 15 deal.

Imports of the super-chilled fuel from the U.S. in the first 11 months of 2019 were 258,955 tonnes, much lower than the 2.15 million tonnes imported in the 12 months of 2018, according to Chinese customs. This is a tiny fraction compared to China’s total LNG imports in the January-November 2019 period at 53.85 million tonnes.

METHANOL, ETHYLENE GLYCOL (MEG)

China imposed tariffs of 25% on U.S. methanol and MEG in June 2019. They were not affected by the Jan 15 2020 deal.

Imports of U.S. methanol from January to November 2019 dropped to 109 tonnes compared with 75,118 tonnes in full-year 2018. China imported only 69,600 tonnes of U.S. MEG in the first 11 months of 2019, compared with 147,890 tonnes bought through the whole year of 2018.

These were also a tiny part of China’s total January-November 2019 methanol imports at 9.7 million tonnes and MEG imports at 9.03 million tonnes.

SOYBEANS

No additional duties have been removed as of Jan 15 but there have been some hefty goodwill waivers on tariffs in recent months.

A 25% tariff on soybeans in July 2018 had halted all buying by commercial buyers, but Chinese crushers went back to the U.S. market following a trade truce in December 2018. An additional 5% duty came into effect in September. The Chinese government has given tariff exemptions to some U.S. soybean imports.

China bought 13.85 million tonnes of soybeans from the United States in January-November, down 16.4% from same period in 2018.

PORK

American pork faces total import duties of 72% after including the 12% “most-favored nation” tariff. These duties were not changed in the Jan. 15 deal, but China is expected to boost U.S. meat imports. An outbreak of African swine fever in China has decimated the world’s largest pig herd and sent domestic pork prices soaring to record levels.

Total import tariffs on U.S. frozen pork went down to 68% from Jan. 1, after a cut in tariff rates on frozen pork shipments from all countries. This did not apply to carcasses, chilled pork and offal.

U.S. pork exports to China and Hong Kong were up 49% year-on-year in value at $1.18 billion from January to November 2019.

SCRAP METAL

No changes to duties on scrap metal on Jan 15. An additional duty of 5% on U.S. aluminum scrap, which would have been effective on Dec. 15, 2019, was canceled last month. The material was already affected by an initial 25% tariff in April 2018, followed by another 25% in August 2018.

Shipments of aluminum scrap to China were down only 19.7% year-on-year in the first 11 months of 2019, but those of U.S. scrap copper, subject to a 25% tariff since August 2018, crashed by 75.7% over the same period.

RARE EARTHS

China in 2019 raised the prospect of restricting rare earth exports to the United States but has not announced any formal curbs or export duties. In the other direction, it has levied 25% tariffs on imports of U.S. rare earth ore and rare earth magnets since June 2019 but canceled an additional 5% tariff on the latter that was due to take effect in December 2019.”

 

Can there be any doubt that the deal is good for commodities? Some in the mainstream media seem to think so but as Sal Golbertie, president and chief investment officer at Teucrium Trading said in an article by MarketWatch,

“We really didn’t expect the Chinese to immediately step in and buy with the signing of the trade deal. They will only buy what they need, and only when they need it.” That said, there is no doubt the Chinese will buy U.S. grains, and they do need vast amounts going forward, which should put a floor on grain prices at some point.” 

A reduction of tensions must be positive in general however, the tariffs had also had the effect of altering trade patterns as China sought alternative sources for what it required. We will now need to watch and see how markets are impacted and what effect it will have on those trading patterns and commodity prices in general. Almost certainly, China will only buy when and as it required to and so there may be little real impact beyond sentiment in the near term?