Last month we noted that commodity prices held up well in the...

  1. 1,519 Posts.
    lightbulb Created with Sketch. 217

    Growing global trade tensions weigh heavily on commodities ...

    Last month we had noted that commodity prices had been fairing pretty well in the face of growing uncertainties surrounding the global economy. This shifted when US President Trump upped the ante in the trade war with China by imposing a 10% tariff on Chinese imports that had not been covered by the tariffs imposed to date. The Chinese then responded by allowing the Yuan to depreciate, moving above the critical 7 level. This has been described as the “weaponisation” of the Yuan in the trade war marking a significant escalation and signifying just how far apart the two parties are from a resolution. In the month our global trade index (which measures global import/export orders) turned south falling to 47.8, the lowest read since Feb 2010 while the JPMorgan manufacturing PMI fell below 50 indicating that global manufacturing was set to contract.

    So even though the Chinese administration is responding to these threats by easing monetary and fiscal policy, we now see Chinese growth slowing from 6.1% in 2019 to 5.8% in 2020. Through this period it is likely that the year to June 2020 will prove the weakest. In addition, given that the shift in the pace of growth follows a number of years of incremental adjustment, there is the risk is that conditions could feel materially weaker than our forecast suggests. The risks to China’s economy remain heavily skewed to the downside.

    ... with iron ore & coal falling around 20% in July ...

    Through July there was a significant correction across the commodities spectrum. In the month, from peak to most recent observation, spot iron ore (62%fe) fell 22% to US$98/t while lower grades did marginally better with 58%fe falling 19% to US$87/t. Met coal, which was already under pressure due to weakening demand, fell 18% to US$158/t while thermal coal is down 15% to US$64/t. This variation in the magnitude of the correction highlights there’s more going on than just fear about what impact the trade war will have on activity and demand. As such we have adjusted our near term forecasts to end 2019. We now expect spot iron ore to track sideways around US$100/t with met and thermal coal tracking sideways around US$150/t and US$65/t respectively. By end 2020 we still see iron ore falling to US$65/t (current spot price is still some 30% higher than it was before the collapse of Vale’s tailing dam), met coal down to US$135/t while thermal coal lands on US$63/t.

    ... crude oil prices easing 12% ...

    By comparison, crude oil (Brent) is down 12% to US$58bbl as fears about a conflict in the Gulf region were more than offset by global growth concerns and increasing US supply. We see these forces continuing to battle it out this year and have left our forecast for end 2019 at US$62bbl (with downside risks).

    ... but base metals doing better falling just 4%.

    Base metals were also hit by global growth concerns but here the impact was more mixed as the supply of most base metals remains tight to very tight. Westpac’s Base Metals Index fell 4% in the month with aluminium, copper, zinc and lead all down around 5% while nickel, which for now has a very tight supply profile in the face of rising demand for battery raw material, was broadly flat (+1%). Slower global demand will continue to weigh on base metals with the Base Metals Index forecast to fall a further 8% by end 2020.

    Chinese growth concerns have emerged just as iron ore supply has improved.

    For iron ore, as concerns about Chinese growth emerged, seaborne trade supply started to pick up, at first from Australia but more recently from Brazil. Up to June Chinese ore production lifted 12% in the year but imports were down –11%yr with Brazilian imports crashing almost –50%yr; Australia imports were flat in the year (up from a January low of –11%yr). But in July imports jumped 21% in the month to be up 1% in the year.

    On early reports, imports of Brazilian ore jumped 130% to 17.7mt in July, back to the level of a year ago. In addition, port inventories of ore lifted 5% through July with Australian ore inventories rising 9%, Brazilian ore lifted 1% with the remainder up 2%.

    So it is no surprise that the 62%fe has dropped below the price of Chinese domestic ore, with imports trading at around a 10% discount to domestic ore, a further sign seaborne trade is rebalancing as supply lifts.

    But imports are lumpy and part of the July bounce was a recovery from the 10% collapse in June. Shipments from Brazilian fell 3% in July while Australian exports fell 6%. But there is no doubt the recovery in supply is underway and Brazilian exports, year to date, are just 7% below where they were in 2018. We estimate that Chinese imports are set to be 2% lower in 2019 than they were in 2018.

    Chinese steel production to moderate as housing activity slows.

    Westpac is looking for a modest correction in Chinese steel production though this year. Following the surge in output though 2018 (up 17% in the year to December) production has slowed as sales stalled and inventories rose. Chinese housing starts have started to soften while the pace of investment growth has eased which all points to a further moderation in steel sales, rising inventories and lower prices. This combination of a lift in supply and a moderation in demand is why we see the steel price correction extending through 2020, driving iron ore prices down to US$65/t by year’s end.

    Chinese coal import controls are starting to bite.

    Last month, we highlighted the growing risk of Chinese import controls on Australian thermal coal. Through July it became increasingly clear that the administration was likely to strengthen controls on coal imports through August in a battle to keep volumes flat in the year. July was a record month for imports and in response the National Development and Reform Commission (NDRC), is said to be considering delaying clearance coal at all ports from August. Met coal imports are now unlikely to receive any dispensation, due to rising domestic supplies, falling domestic prices and weaker demand. As such, we have taken the recent fall in met coal prices as a signal that these restrictions are starting to bite and expect it to hold prices around US$150/t to year end. However, with supply holding firm, we see this price correction extending through 2020 taking the spot price down to US$135/t.

    https://westpaciq.westpac.com.au/Article/39763


 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.