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HedgeTalk: US – China Trade Update And Foreseeable Commodity Price Volatility

By: John Trefethen, Director & Co-Founder

The US – China trade talks remain delayed, but not derailed. Talks were scheduled to review China’s progress on increasing imports from the US – commonly known as the “phase-one” US - China trade deal. Under the phase-one deal signed in January 2020, China pledged, among other things, to boost US imports by $200bn in 2020 and 2021 above 2017 levels. US markets highlighted in the agreement and expected to benefit the most are the manufacturing, agricultural, and energy industries. This was done presumably to narrow the trade deficit that has been steadily expanding for the past decade between the US and China. Below is a comparison of US exports and imports with China since 2003:

Roughly half a year since the phase-one agreement came into effect, China has bought less than a quarter of the targeted full-year amount of US goods committed under the deal. Since the inception of the phase-one agreement, many economists and other experts didn’t feel it was realistic for China to increase its purchases of US goods and services by the stated amount. The obligation has become even more difficult to meet as the COIVD-19 outbreak led to a plunge in Chinese demand. Below is a chart showing China’s progress in complying with the agreement through June 30, 2020, highlighting where China’s purchases of US goods stand compared to the target.

The phase-one deal highlights commitments to each of the product categories mentioned earlier – manufacturing, agriculture and energy. China is behind the target amounts for all three sectors. It has shown the least progress in its purchase of US energy products in the first six months of 2020, driven in part by decreased demand during COVID-19 lockdowns. Below is a breakdown of China’s progress in meeting targeted purchase amounts for each of the three categories.

It’s likely China will not recover and fulfill its commitments. The repercussions from this could range from a renewed trade war - similar to 2018 - to tearing up the agreement and starting fresh. Whoever occupies the White House in 2021 will dictate this strategy should China ultimately fall short of its obligations. With myriad outcomes possible – compliance, non-compliance, renewed trade wars, a new agreement, and many other options – one thing is certain, commodity price volatility will increase and be with us for some time. Each of the outcomes highlighted will result in widely different price environments for each commodity asset class impacted by the phase-one deal. Now is the time for anyone involved in a commodity supply chain to get a hedge program in place, or to remain diligent with pre-established programs, and to actively manage what will be volatile markets, minimize price risk and preserve margins.


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