Commodities challenged by protectionism

by: Casper Burgering , Nadia Menkveld , Georgette Boele , Hans van Cleef

Risks increased on US protectionism fears

Most commodity prices appreciated over the past three months, except for oil (Brent), palladium, sugar and gas (TTF). All-in-all, the CRB-index increased by 6% since mid-December 2017. But over the past few weeks, uncertainty in commodity markets has increased and investor sentiment dampened.
We remain neutral in our commodity price outlook. Global economic growth provides a solid base, but risks have increased in the short term. These risks relate to a potential tightening of financial conditions (Fed rate hikes), increased geopolitical tensions and growing risk aversion amongst investors in commodity markets with rising trade tensions. Trump’s tariffs tend to threaten trade ties on a global scale. Due to the increased US protectionism, risks are rising and threaten to derail a recovery in global growth. Uncertainty remains high, because it is unclear to what extent these trade tensions will escalate.

Monthly Commodity Update-March 2018.pdf ()

More US production and an OPEC exit strategy matches global demand growth expectations

Oil prices currently trade within narrow ranges after the downward correction which was mainly triggered by more focus on US production growth. Although the number of outstanding long contracts has dropped, it remains at elevated levels resulting in possible downside risk for oil prices if more longs are squeezed. Nevertheless, even a further 10% downward correction would still fit within the longer term expected uptrend. The US will become the world’s biggest oil producer in 2019. Still, the rise in global demand will provide enough room for both growth in US shale oil, and an exit strategy for the OPEC production cut agreement. Despite tensions between Russia/Ukraine about gas deliveries, no disruption of gas flows towards the EU is expected. TTF natural gas prices showed a price jump due to seasonal demand, but this move was short-lived.

Deterioration of near-term gold price outlook

The near-term outlook for gold prices is deteriorating. The rallies in gold prices have run out of steam more quickly reflected in lower tops. The most recent rally in gold prices lost already momentum at USD 1,340 per ounce. In the current environment, gold prices do well if equities and US bond yields move higher in a risk-on environment. This is quite unusual. This is mainly because the US dollar has been under pressure in such an environment. In short, the US dollar is the most dominant driver for gold prices at the moment. Despite the negative long-term outlook for the US dollar, we expect some recovery in the short term. A dollar recovery will probably push gold prices below USD 1,300 per ounce.

Trump’s tariffs increased uncertainties

Sentiment has weakened over the past couple of weeks in the base metals complex on increased uncertainty. Trump’s trade tariffs on steel and aluminium have increased the possibility of a global trade war and made investors more nervous. Also a hawkish Fed and relatively weak manufacturing data early February contributed to softer base metals prices. In the short term, we think that base metal prices will be dominated by the above-mentioned uncertainties and sentiment will remain weak. This will lead to a neutral price trend. However, we think that underlying supply and demand fundamentals and global economic growth will provide a solid base for most base metal prices (aluminium, copper and nickel) this year. The zinc market will face a surplus due to the ramp-up of supply. This should lead to softer prices. The long term fundamental base (2019) will remain robust, with deficits in almost all base metals markets, except for zinc.

Trump’s tariffs counterproductive

While the domestic steel industry applauded the newly introduced trade tariffs in the US, many other stakeholders consider the measures to be damaging and counterproductive going forward. The European association for steel manufacturers – Eurofer – expects that sales of EU steel in the US could decrease by as much as 50% as a result of the measure. That means 1.5% of European steel production. Next to that, a shift in trade patterns is not unthinkable: more steel is expected to flow into EU markets and the continent cannot accommodate so much steel at current demand levels, with EU price erosion as a result. US price of steel will initially rise, as the domestic supply is insufficient to meet demand. In addition, steel end users in the US will try to build stocks. But we do not expect that this will last for long and that the US steel price – due to seasonal effects – will fall again towards the summer.

Cocoa price on highest level in 17 months

The price of cocoa has increased significantly and is now at the highest level since 17 months. The increase is due to a lower than expected harvest in the coming season and unfavourable weather conditions in West Africa. We expect the price of cocoa to increase to 2,300 USD/Mt by the end of the year. The price of sugar went below 13 USDc/lb and will remain under pressure, due to large harvests in India. The ISO (International Sugar Organisation) expects world sugar production to increase by 6% this year and a large harvest is expected for 2019 as well. The price of Arabica-coffee has decreased by 5% ib the last 3 months. Higher exports and prospect of a large harvest in season 2018/2019 has put pressure on prices. However, ABN AMRO expects the price to recover slightly due to the fact that end-users are filling their depleted stocks