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Swapping aluminium for soybeans

The outlook for heavily traded commodities hit by tariffs
July 19, 2018

The tit-for-tat trade spat between the US and China is ongoing, escalating, and will undoubtedly have unintended consequences.  It’s time to think carefully exactly which industries stand to lose out, what product substitution consumers may be forced into, and where gluts may build. Today we’re focusing on the wholesale prices of aluminium and soybeans as these have already been hit with tariffs; we compare current Western markets to those on the Dalian Commodity and Shanghai Futures Exchanges.

In a normal world, price differentials for liquid, international commodities are arbitraged out almost as soon as they appear. The big producers, processors and buyers are constantly comparing wholesale prices across the globe, factoring in exchange rates, cost of carry and transport. If there’s money to be made, you can bet your bottom dollar that if you blink, you’ve missed it.

Soybeans are of huge international importance, not because we’re sprinkling lots of soy sauce over our Asian noodles, but because they’re a key ingredient in animal feed – and the second most-used oil after palm oil. Four countries dominate 90 per cent of world output: Argentina, Brazil, China and the US. Courtesy of President Trump, Brazil’s exports of the oilseed (which already accounts for 53 per cent of Beijing’s bean imports) are expected to increase even more than the 300 per cent rise they’ve seen over the past eight years.

Not surprisingly, soybean prices on the Chicago Board of Trade have slumped since June – and observed volatility has tripled.  Unfortunately for mid-Western farmers, bearish momentum is at its strongest in four years and pivotal support around 800c per bushel looks set to be tested. If this gives way, then the historically high prices achieved over the past decade (800-1,000c) will be a thing of the past and the market will revert to type, holding between 400c and 800c as it did from 1973 to 2007. Lower prices will also hit farm equipment makers, nitrate producers and shippers. Danish behemoth AP Moller-Maersk has already missed first quarter expected profits, a result they described as “unsatisfactory”, and the shares promptly fell 11 per cent. Lower soybean prices will, however, benefit beef, lamb and poultry farmers and shoppers should pay less for animal protein.

Over in Dalian, East of Beijing on the Yellow Sea, soybeans rallied sharply, from admittedly depressed levels, at the start of this year, subsequently giving back half of those gains since April. Currently trading at 3,500 yuan per metric tonne, they are one standard deviation below their long-term mean regression, but well above their record low of 2,000 yuan (March 2002). Neither pricing nor supply are an issue here; steady as she goes and we’d pencil in a range between 3000 and 4000 yuan for the rest of the year.

Aluminium in Shanghai is also one standard deviation below its mean regression, and close to the lower levels of the past 12 months; downside pressure is light but evident, so we expect further small price falls towards 12,000 yuan per metric tonne. The London Metal Exchange three-month forward aluminium contract spiked in April after tariffs were announced in March; they subsequently undid all the damage. Again, downside pressure is apparent but not excessive and we shall pencil in a drop below the psychological US $2,000 per metric tonne.