Base metals weigh on overall commodity prices amid looming trade war

U.S. President Donald Trump’s decision to impose tariffs on aluminium and steel imports on 1 March heavily dragged on the prices of some base and some precious metals in March, eroding investor confidence globally. Trump declared a temporary exemption for some economies, including Canada and the European Union, but left the levies for China in place, making it clear that China was the focus of his actions. This negative climate was amplified later in the month by Trump’s announcement of tariffs on USD 50 billion of Chinese imports in response for what he called China’s unfair trade practices, which have led to massive trade surpluses in favor of the Asian nation. China retaliated by announcing a reciprocal tariff package on U.S. imports including soybeans, planes and automobiles.

Against this backdrop, commodity prices fell an aggregated 1.9% month-on-month in March (February: +0.8% month-on-month), the sharpest drop in one year. Base metals, along with palladium and platinum, were the main drivers behind March’s poor performance. Energy prices rose in March, however, due to strong fundamentals. Similarly, healthy global demand and fears of limited supply continued to boost prices for agricultural commodities.

Global commodity prices are expected to withstand ongoing political uncertainties this year and next. Chinese officials adopted a more conciliatory tone in recent days, signaling a potential end to the ongoing trade war with the U.S. Moreover, data for Q1 confirms that the global economy remains in good shape, shoring up demand for commodities. Nevertheless, Trump’s aggressive stance toward China remains firmly in place, and he has threatened the country with additional tariffs of up to USD 150 billion. While China has offered to open some economic sectors, it has also stated that the country will retaliate against any punitive measure. If these threats materialize, the global economy will face an all-out trade war between the two countries, which would certainly disrupt global growth and commodity markets.

In this month’s survey, analysts polled by FocusEconomics expect commodity prices to rise 4.3% in Q4 2018 from the same period in 2017, mostly fueled by solid gains in energy and agricultural prices. Further down the road, analysts predict that commodity prices will increase 2.2% in annual terms in Q4 2019

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