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Tuesday, June 19, 2018

545 products in Chinese sights.

By Andrew Whitelaw  |  Source: ICE, Matif, Mecardo

Key points

  • China has retaliated to US tariffs with a list of 545 products which will now be subject of tariffs.
  • The soybean market has fallen 5% week on week and 11% since the start of the month.
  • China will remain a buyer of US soybeans, however, large quantities will be accumulated from Argentina and Brazil.

2018-06-19 Grain Fig 1

2018-06-19 Grain Fig 2

It seemed like the USA and China were on the verge of resolving their trade scuffle. On Friday evening, President Trump announced a range of tariffs targeted towards the Chinese tech industry. In retaliation, China has set its aim on 545 imported products. The biggest impacts have been seen in the grains market.

It is not quite a trade war, but not far away from one. Trade wars can provide good opportunities for secondary countries to gain some advantage, however, in the long term, they tend to be negative for global trade.

The products targeted by China have largely focused on agricultural/food & vehicles. The full list can be viewed here*. The choice of tariff products is in my view quite canny. The largest support base for President Trump has been from manufacturing workers and grain growing regions. The introduction of tariffs on the commodities they produce will hurt his voters in the pocket.

At present, the biggest impact to commodity prices has been on seen in soybean futures. The soybean market has fallen 5% week on week, and 11% on the month. The tariffs will have huge impacts on American farm revenue, with Iowa alone set to lose up to US$624m.

The tariffs leave many questions about the capability of China to continue with trade restrictions. In Figure 2, the imports/exports and production of soybeans is displayed. Over the past ten years, China has on average imported 62% of the worlds export soybeans. This places a huge strain on China’s ability to find alternate origins, especially considering the US is providing 40% of the world's exports.

To satisfy the demand into China without paying tariffs, close to 100% of the global trade in soybeans (ex USA) will have to go into China. This would have flow-on impacts into other soybean destinations, which will likely change origin to the USA.

The tariffs will make Australian produce more attractive to purchase. We have already seen Chinese demand for sorghum ex Australia rise as a result of separate anti-dumping investigations. There is the potential that other products subject to tariffs will be substituted with Australian alternatives.

The previous round of tariff talks & the released lists had no indication of a starting date, leaving room for negotiation. However, this time the tariffs are set to commence on the 6th July, this leaves very little time for both countries to develop an amicable solution.

*Please note that this list was translated from Mandarin using translation software. There are some products which have not been translated correctly (frozen meerkat?)

What does this mean?

The ‘trade war’ if it continues will likely reduce global trade, or at the minimal will result in changes to typical trade flows. If the Chinese economy begins to falter, we are liable to see an impact in Australia as iron demand drops.

This will impact upon the strength of the Australian dollar, assisting with exports but causing import prices to rise.

At its best case, Australia will be able to increase our market share into China for a number of agricultural products.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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