The US-China commodities consequences

Fears of a trade war between the US and China have dominated the headlines of late — though it appears as if those concerns be allayed for now. In May, US Secretary of the Treasury Steven Mnuchin said that the US-China trade war was “on hold” after the countries agreed to drop their tariff threats while they worked on a wider trade deal — although he subsequently said that there had never been a trade war and that he meant “trade dispute”. A day prior to Mr Mnuchin’s announcement, both nations said they had forged “a consensus on taking effective measures to substantially reduce the US trade deficit in goods with China”, that China had agreed on “meaningful increases in US agriculture and energy exports”, with details to be worked out when the US sends a team to the country, and that the Asian nation “will significantly increase purchases of US goods and services”. A day after Mr Mnuchin’s claim, US President Donald Trump tweeted that “China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products” [sic].

Discussing the pause of the tariffs while the framework for reducing the US-China trade deficit was worked on, Mr Mnuchin said: “We are immediately going to follow this up with [Commerce Secretary Wilbur] Ross going [to China] with very hard commitments in agriculture, where we expect to see a very big increase — 35-40% increases — in agriculture this year alone — in energy, doubling the energy purchases. I think that you could see $50bn, $60bn a year of energy purchases over the next three to five years and strategically, that’s very important for us and very important for them.”

The commodities effect

It’s ironic that in the US-China trade war epic, commodities have gone from being a great casualty to now being set to be a big beneficiary (what with China vowing to import more American products). What’s more, there are implications for dry bulk commodities. One product that will likely be included in the truce is soybeans, one of the US-China trade war’s main battlegrounds. Additionally, most of the roughly $20bn in annual US agribusiness trade with China features the product. The beans constitute $14bn of US exports to China, but chief analyst with Shanghai JC Intelligence Co. Li Qiang said that China could put up their annual US soy imports to over 40m to 50m metric tonnes. Upon news of China and the US’ potential ‘ceasefire’, soybean prices on the Chicago Board of Trade commodity exchange increased as much as 2.4%.

“I’m cautiously optimistic that the talks are going to possibly stop the tariffs — or at least they’re talking about it, anyway,” commented president of the American Soybean Association John Heisdorffer.

Lately, buyers have been staying away from American supplies because of uncertainty regarding whether the government would go ahead with its planned tariffs. The Chinese government last month threatened putting a 25% levy on the imports of US soybeans, and if that were to occur, it would increase American beans’ price for Chinese buyers and render South American beans more appealing. Whereas China last year bought around 33m tonnes of soybeans from the US, the Asian nation took delivery of over 50m tonnes of the beans from Brazil in the same period. Terry Reilly, senior commodity analyst for Futures International, felt that increasing US soybean exports in the short term would be difficult.

“I’m a firm believer that China will continue … to take what they committed from Brazil — and it will be tough to really boost US soybean exports over the short term,” said Mr Reilly, explaining that China has already essentially contracted out about two or three months’ worth of buying — mainly from South America.

There are other US agricultural items that could profit from boosted imports from China, such as sorghum and distillers’ dried grains. In May, the Chinese government got rid of an anti-dumping and anti-subsidy investigation into American sorghum purchases. China bought around $1.1bn worth of US sorghum in 2017, but last month, the Asian nation placed 179% dumping duties on sorghum imports. Following the imposition of the sorghum tariff, a number of cargoes of the commodity destined for Chinese ports became stranded due to the fact that grain handlers would have had to pay the big levies (some of the sorghum shipments were eventually rerouted to Japan, Saudi Arabia and Spain).

“We hope the dismissal of these cases reflects a lessening of trade tensions as our leaders continue to dialogue,” said Don Bloss, chairman of the American organisation National Sorghum Producers.

Uncertain trade relations

However, a trade deal between the US and China is still on shaky ground. With a summit between President Trump and North Korean leader Kim Jong-un due to take place in Singapore on June 12, Cowen Washington Research Group strategic Chris Krueger said that the meeting could decide whether the US-China trade agreement progresses.

“So long as Singapore is pending, we do not believe these tariffs will be implemented, but once the summit ends, game on,” said Mr Krueger. “In our opinion, as goes the summit, so go the tariffs.”

At the time of writing, however, the meeting between the US and North Korean leaders hung in the balance. While hosting South Korea’s President Moon Jae-in at the White House near the end of May, President Trump claimed there was a “very substantial chance” that the summit might not occur, stating that North Korea needed to meet conditions for the meeting to take place (though he did say the summit might occur “later” if the planned meeting did not happen). North Korea has claimed it may call off the event if the US insists that the country renounces nuclear weapons unilaterally.

Aside from North Korea’s potential role in a US-China trade agreement, it’s a complicated time for Present Trump as it is when it comes to tariffs. Towards the end of May, it was reported that Russia, Japan and Turkey had sent bills concerning how much US tariffs would add to the cost of steel and aluminium exports to the US (based on trade from last year), following similar moves from China, India and the EU. Just a few days prior to this, it was reported that Japan, the US’ fourth-biggest export market in 2016, was considering putting levies on US imports worth $409m in response to President Trump’s tariffs on the metals. The retaliatory taxes would have an equal value to duties the US imposed through its levies, according to Japan’s national public broadcasting organisation NHK, but will be viewed as a bargaining tool to persuade the US government to make Japan exempt from the tariffs. And that’s not forgetting that, according to Kevin Cirilli, “we’re just ahead of the June 1 deadline that the President has said would be looming over for regards to whether or not he wants to make permanent the steel and aluminium tariff increases for Mexico and Canada for NAFTA”. Additionally, the EU is said to be bracing itself for a trade war with the US after the Trump administration signalled that it would not extend the temporary exemption for EU companies from the metal tariffs, which is due to end on June 1.