Commodities: Economic Outlook Commodities March 2018

March 14, 2018

Fears of a trade war and renewed market jitters fuel uncertainty in commodity prices

U.S. President Donald Trump upended commodity markets with his announcement on 1 March to impose a 25% tariff on steel and a 10% charge on aluminium imports. These measures, which were signed on 8 March and will go into effect on 23 March, sent U.S. steel prices to multi-year highs in recent days. However, steel prices elsewhere declined in anticipation of weak demand and higher inventories. Prices for other commodities closely related to steel, such as iron ore, tumbled in the first days of March. Furthermore, the prices of other commodities directly affected by the measure, such as aluminium, dropped in recent weeks; higher domestic prices for aluminium in the U.S. will allow smelters in the country to ramp up production, triggering global oversupply.

Another cause for concern is the possibility of retaliation from trade partners. While Trump exempted Mexico and Canada from the duties for now, China, the European Union and Japan have already warned that they are prepared to retaliate against the U.S. If the conflict escalates, it could lead to a trade war among the world’s largest economies, which could hit the ongoing global healthy growth momentum. Weaker global economic dynamics would, in turn, exert downward pressure on commodity prices.

The full impact on the U.S. economy of Trump’s decision to restrict imports of foreign steel and aluminium has yet to be seen. The tariffs would push up inflation in the U.S., which would ultimately translate into lower economic growth. An uncertain impact on the U.S. economy, coupled with potential damage from a trade war and likely warnings from the World Trade Organization, could force Trump to unravel these measures. Trump is not the first president to impose tariffs on steel imports in recent years. Former U.S. President George W. Bush also implemented punitive tariffs on foreign steel in 2002, but they were rolled back the following year amid fierce international criticism and before retaliation from the EU came into effect.

In addition to the uncertainty generated by Trump’s announcement, the equity rout in February highlighted that the calm in financial markets that dominated the global economic landscape last year is likely over. Heightened volatility in financial markets tends to quickly reverberate across the entire global economy, including in commodity markets and especially hitting oil prices.

In this month’s survey, analysts polled by FocusEconomics expect commodity prices to rise 2.9% in Q4 2018 from the same period in 2017. Surging prices for agriculture products due to potential supply disruptions and hefty demand will lead Q4 2018’s increase, followed by smaller gains in the rest of the main commodity groups. Further down the road, the Consensus view among commodities experts is that growth in commodity prices will inch down to 2.8% in Q4 2019, mostly reflecting less robust expansion in agriculture and energy products.

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