- Commodity prices have been under pressure thanks to trade tensions and a stronger US dollar.
- However, despite weakness in broader commodity markets, bulk commodities have been largely immune to the selloff.
- The Commonwealth Bank says this is because they are more heavily influenced by domestic policy actions in China.
Commodity prices have been under pressure, weighed down by persistent concerns around negotiations between the United States and its major trading partners, especially China, along with broad-based US dollar strength.
The Thomson Reuters-CoreCommodity CRB Index has fallen 7.7% since late May, leaving the index down 1.5% for the year.
Of the two factors that have contributed to recent selloff, Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, believes its the dollar, rather than trade uncertainty, that has been the major driver of recent weakness.
“Commodities have responded particularly negatively to US-China trade tensions,” he says.
“The obvious reason is the fear that China’s commodity demand could ease, which is significant because China accounts for 40-60% of global commodity consumption.
“However, it is the stronger US dollar that has resulted from an escalating US-China trade war that has weighed more heavily on commodity prices.”
In particular, Dhar says base and precious metals appear to have been the most negatively impacted from the stronger US dollar.
As seen in the chart below from the Commonwealth Bank, like bulk commodities, China’s share of based metals consumption globally is high, sitting around 50%.
However, while similar in terms of global share, the recent price performance of the bulks, compared to base metals, has been resilient, with prices largely immune to the downdraft in other commodity markets.
Dhar says there’s a simple explanation for the recent divergence.
“Steel, iron ore and coal have been the least impacted by the stronger US dollar… because these commodities are exposed heavily to China’s supply side reforms,” he says.
“These reforms include curbing pollution and reducing overcapacity, which is helping drive up prices, particularly for higher quality iron ore and coal.
“We believe these trends will continue if the US-China trade war deepens.”
That theory could be put to the test within days as the public comment period on proposed tariffs on $US200 billion worth of Chinese imports ends today, opening the door for the tariffs to implemented.
“That would potentially mark the third round of tariffs, which to-date have totalled $5050 billion worth of Chinese imports,” Dhar says.
“China has responded in kind and will likely retaliate if US proceeds with its pending tariff plan.”