Source: Wood Mackenzie
“Previous experience shows the escalation of trade tensions always has a negative impact on the copper price, as the market believes that increased tariffs will have a negative impact on global economic activity and, therefore, on copper demand. A trade war between the two largest economies also raises the spectre of a global recession. However, after the announcement today, the copper price actually ticked higher on both the SHFE and LME exchanges. It is believed that some money from the Chinese government has gone into the Chinese stock market to support market sentiment.
“We estimate that China’s indirect copper exports to the U.S. accounts for 3% of Chinese total copper consumption per year. The list of $200bn worth of Chinese goods contains most of the copper intensive products that China exports to the U.S., including products ranging from home appliances to electrical equipment. In our base case, we assume that the 10% tariffs on these goods will be maintained through 2019. Under the 10% tariff, most of the copper intensive goods from China still have a cost advantage over products from other countries. Therefore, the impact on Chinese copper demand is very limited under our current forecast.
“However, the 25% tariff will make a material difference and we estimate Chinese total copper consumption will drop by 0.5% if the tariff is effective on a whole year basis. However, there are only 7 months remaining for 2019. This means that impact on this year’s copper demand will only be around 0.2% to 0.3% on top of our current forecast of 1.9% growth for total copper consumption this year.”
“The latest increase in U.S. tariffs on Chinese goods is a modification to the original 21st September introduction of a 10% tariff on $200 billion worth of Chinese goods. For aluminium and aluminium-contained products, the new tariffs represent more of the same, but at a higher pain threshold for U.S. consumers. For direct aluminium semi-fabricated products, such as sheet, China has been busy redirecting exports to other markets since the introduction of Section 232 and duties on common alloy and foil products. Chinese exporters of semis have also been granted exemptions to the tariffs.
“There is a subtle but important difference between the 10th May deadline and the 21st September deadline. The 10th May deadline was softer. Goods that have already left Chinese ports before 10th May will not be subject to the higher tariffs. According to the formal notice increasing the tariffs, the increase will apply to goods that both 1) enter the U.S. for consumption on or after 12.01 am and 2) were exported to the U.S. after 10th May. In other words, at 12.01 am on Friday, the tariff rate will technically be 25%, but only for goods that leave China after that point. Given shipping times of 2-3 weeks, this provides a window for new negotiations. By contrast, in the formal notice implementing the 10% tariff rate on 21st September 2018, the tariff applied to goods that entered the U.S. for consumption after the deadline and there was no similar “in-transit” exclusion.”
Steel and Iron Ore
“For steel, an escalation of tariffs will just add to the bill paid by U.S. consumers.
“Section 301 tariffs against China will impact less than 1% of all U.S. pre-sanctioned steel trade – compared to around 98% which are covered under Section 232.
“Chinese steel exports to the U.S. have been falling for many years, as a result of a multitude of other duties. Last year, the U.S. imported 0.95 million tonnes of steel from China – or around 3% of all U.S. steel imports – compared to 4.6 million tonnes a decade earlier.
“However, the latest escalation will add to price pressures. The Chinese material that is imported by the U.S. had the highest average value of any imported steel last year – US$2179/tonne compared to an average of US$1091/tonne. This suggests that Chinese steel imported by the U.S. is specialised steel that cannot currently be sourced elsewhere and is, therefore, required by U.S. buyers. Therefore we expect U.S. buyers will continue sourcing those steels from China and absorbing the additional duties themselves. In addition, the U.S. imports around 40 million tonnes of steel through steel-containing goods, some of which come from China. If the increased tariffs stay in place, this will further add to the bill paid by U.S. consumers.
“The U.S. does not import iron ore from China. Therefore, the impact is negligible for iron ore.”
“The key difference is, of course, the increase from the original 10% tariff, introduced on 21st September last year, and the new 25% rate from 10th May. The impact for refined lead and concentrates will, however, be negligible.
“At the turn of the century, China was typically exporting around 20 kt/a of refined lead to the U.S, but that total has not exceeded 1 kt/a for well over a decade. So far, only refined lead alloyed with antimony – commonly used in some batteries and for radiation shielding – has been included in the tariff list, as opposed to pure lead. As such, the tariffs will have no immediate impact and are unlikely to in the future if these tariffs persist. China’s domestic demand for refined lead has meant they simply haven’t had excess production to spare for export. The trade in lead concentrates flows in the opposite direction – into China – as the U.S. has no primary lead smelters but produces over 250 kt/a of contained lead from its mines.
“The Chinese preference has long been to export lead in the form of an added-value product, particular as a lead battery. Unlike the miniscule refined lead exports to the U.S., the export trade in lead batteries has been worth approximately $400 million per annum over the past decade. A 15% hike in tariffs is going to hurt. For several years now, the Chinese industry has focused more on keeping up with growth in domestic demand than satisfying export markets for replacement automotive batteries. These new tariffs could add impetus to the existing drive for China to offshore battery production for export markets to JV companies set up in nearby countries with lower production costs”
“The tariffs introduced in 2018 had a clear and negative impact. There was a lag before the effects were realised but China trade data showed a fall in volumes from the end of 2018 much greater than normally occurs at that time of year. This was not limited to China-US trade; there were clear spill-overs to other economies.
“The U.S. economy also suffered; a detailed study by Princeton University and the US Federal reserve showed that 2018 tariffs did not result in exporters lowering prices to offset. Instead, the bill has been paid by U.S. consumers and companies. Also, the losses to consumers were greater than the new tariff revenues for the government. In short, the U.S. economy lost out overall.
“We estimate that the negative impact of Friday’s tariff increase could be even greater. The 10% tariff of 2018 was not fully passed on to U.S. consumers – importers have absorbed some of the costs through margin compression. A tariff of 25% is much harder to ignore, and will cause more displacement and disruption to trade flows.
“In addition, the tariffs of 2018 came while the global economy was growing rapidly. That is no longer the case. The Q1 GDP data for China and the US were propped up by temporary factors; we expect both to slow over the coming months. Growth is also weak in Europe and other key areas. We currently forecast global GDP growth to slow from 2.9% in 2018 to 2.6% in 2019. Trade war escalation could almost certainly push this down to 2.3-2.4%, similar to what we saw in 2016.”