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Metals Bear Brunt of Trade Concerns

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07/11/2018 | 02:07pm CEST

By David Hodari

Metal prices tumbled Wednesday amid concern that the Trump administration's threat of more tariffs on Chinese goods could sap demand for everything from copper to platinum.

The price of copper plunged 2.9% to $6,162.50 a metric ton in London, with zinc, nickel, lead, and tin all shedding more than 2%.

Metals have been at the forefront of the market's reaction to the burgeoning trade dispute between the U.S. and China, the world's largest economies.

"You've already seen tariffs on aluminum, steel, and anything that goes into what consumers are buying," said Kash Kamal, an associate at BMO Capital Markets. "We'll see those prices inflate the cost on the consumer level, leading to slowing demand and knocking commodities prices."

Copper, which is often viewed as a gauge of Chinese economic health, is down almost 15% since early June, when investors' nerves over trade became particularly apparent. Nickel is down 11% since then, while aluminum is down by around 9%. Platinum and palladium, two precious metals used in the manufacturing of cars, have also sold off.

The White House said Tuesday it would assess slapping fresh 10% tariffs on $200 billion in Chinese goods. China has threatened to match U.S. tariffs with its own countermeasures.

Tuesday's headlines piled overnight pressure on Chinese markets, prompting sharp falls for commodities that showed no signs of letting up as trade moved into Europe.

"We've seen [Shanghai Futures Exchange] selling in free fall and that's spilled over into [London Metal Exchange] futures. It's hard to see how this scenario can be de-escalated," said BMO's Mr. Kamal.

LME bets on the future movement of copper prices also moved to their most bearish since 2016, according to Alastair Munro, a broker at Marex Spectron in a note.

"Trying to pick a bottom as the shorts add [up] has been futile," Mr. Munro said, referring to investors who are increasingly betting on further price falls.

The threat of fresh levies follows last week's imposition of tariffs on $34 billion of Chinese exports of machinery, components and electronics, with China responding in kind. Also scheduled are tariffs on $16 billion of Chinese electronics and other components.

Commodities across the board traded lower Wednesday, with Brent oil down 2% and agricultural commodities such as corn, cotton and coffee being sold off.

Metals are particularly sensitive to concerns over global trade and China. Over half of many metals are bought by the country. Analysts are concerned that tariffs will knock consumer buying, particularly in metal heavy products such as cars and air conditioners.

"Air conditioners are a huge source of copper demand in China, they're a real growth area for the Chinese copper market and account for about 25% of demand in the country," said Oli Nugent, a commodities strategist at ING.

The continued strengthening of the U.S. dollar has also played a part in eroding the value of industrial metals. A stronger greenback makes dollar-denominated commodities more expensive for other currency holders. The WSJ Dollar Index -- which measures the currency against a basket of 16 others -- was last up 0.4%, extending its three-month gains to 5.3%.

The stronger dollar added to pressures on gold, which was down 0.4% at $1,250.10 a troy ounce.

As pressures build, analysts expect more selling of metals, particularly copper.

"There's certainly more risks skewed to the downside for the commodities because of these tariffs," said Xiao Fu, head of commodities research at BOCI Global Commodities.

Among base metals, zinc dropped 2% to $2,574.50 a metric ton, aluminum fell 0.7% to $2,071 a metric ton and tin traded 2.1% lower at $19,335 metric ton. Nickel was down 3.1% to $13,725 a metric ton and lead fell 3.4% to $2,242 a metric ton.

Aside from gold, other precious metals also fell with silver down 0.86% to $15.95 a troy ounce, platinum 1% lower at $838.80 a troy ounce and palladium falling 0.7% to $937.75 troy ounce.

Write to David Hodari at David.Hodari@dowjones.com

Stocks mentioned in the article
ChangeLast1st jan.
GOLD -0.07% 1200.21 Delayed Quote.-7.94%
LME COPPER CASH -0.70% 6276 End-of-day quote.-12.60%
LME NICKEL CASH -1.04% 12845 End-of-day quote.1.22%
LME ZINC CASH -0.18% 2526.5 End-of-day quote.-25.19%
PLATINUM 0.13% 825.08 Delayed Quote.-10.95%
SILVER -0.02% 14.444 Delayed Quote.-15.74%
US DOLLAR INDEX -0.06% 94.13 End-of-day quote.2.48%
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