In-Depth: Trade deal fails to ignite commodity

Commodities with the exception of metals struggled to get excited about the phase 1 US China trade deal. Questions regarding China’s ability to buy the stipulated quantities of agriculture products added some downside pressure to grains. The energy sector was weighed down by ample supply as geopolitical risks continued to fade.

19 January 2020: While global stocks, led by the US technology sector, continued their ascent, the first two weeks of trading have been more challenging for several commodities. While metals, both industrial and precious, have recorded early January gains both energy and agriculture have struggled. Following a strong December, the Bloomberg Commodity Index which tracks the performance of 22 major commodities has now recorded two straight weeks of losses and is currently down by 1.6 percent so far this January.

During the past two weeks, the market has reacted to major events such as the temporary flare up in Middle East tensions and the signing of the US-China trade deal. The US killing of a top Iranian general created a short-term worry and Brent crude oil spiked above $70/b before returning to the mid-60’s as tensions eased. Gold meanwhile surged past $1600/oz before quickly returning to the current level around $1550/oz. Both a reminder that a real disruption and with that a real threat to peace is needed for gains in both to be sustained.

This past week however, it was the signing of the phase 1 trade deal between the US and China that attracted most of the attention. The very lukewarm response across commodities, that stands to benefit from the expected and dramatic pick up in Chinese buying, spoke volumes about the unease in the market about whether this deal is workable or not. In order for the Chinese to buy more US produced oil, gas, soybeans and other commodities, other suppliers will have to suffer.

This comment in the China Daily highlighted the risk and also the reason why the market has responded with a lot of caution. In an article entitled “US faces pressure to increase exports” they wrote: “Most (Chinese) import companies are private, and many are foreign-funded. The Chinese government cannot give orders to these companies. In addition, consumers will not buy products out of political considerations. The US is clear about all of these facts.”. In addition, Reuters reported Vice Premier Liu He saying that China’s other suppliers of agricultural commodities will not be impacted since the buying will be based on market principles.

These comments only leave one route for US producers. They have to be price competitive, something that poses a challenge. An example being soybeans with rising production in Brazil – China buys 80 percent of Brazil’s soybean export – and a BRL near a record low making Brazilian beans more competitive. The front month soybeans futures contract in Chicago reached an 18-month high on December 31 but has since fallen back with selling accelerating following the signing of the deal.

Source from: The Peninsula