Tariffs weigh heavy on commodities forecast
Experts say trade war is crunching the metal, chemicals/plastics and logistics industries.
A group of industry experts says risk is one thing businesses can bet on for 2019 as the global trade war escalates.
The Right Place economic development agency and its Supply Chain Management Council hosted the Commodity Trends 2019 Outlook at Grand Valley State University’s Eberhard Center on Sept. 12.
Speakers included Sonja Johnson, executive director at GVSU’s Van Andel Global Trade Center; Lisa Reisman, co-founder and editor of Chicago-based metal market sourcing and trading intelligence publication MetalMiner; Mark Kallman, vice president, engineering resins, at Fort Worth, Texas-based RTi; and Greg Weigel, executive vice president, global operations, at Itasca, Illinois-based AIT Worldwide Logistics.
All four presenters cited concerns over the ripple effects of U.S. import tariffs enacted in March by President Donald Trump and the resulting retaliatory tariffs on U.S. exports by China, the European Union, India, Japan, Turkey, Canada, Russia and Mexico.
Johnson said the tariffs were made possible under the Trade Act of 1974, sections 201, 232 and 301, which together grant the president a legal framework by which to levy tariffs on imports if they pose, or threaten to pose, “a substantial cause of disruption to the U.S. domestic industry.”
Section 201 tariffs are the type levied earlier this year on imports of large residential washing machines and solar cells and modules as a result of Whirlpool’s suit against Samsung and LG for unlawful import “dumping” practices. This type can only be levied for a maximum of eight years.
Tariffs levied under Section 301 target China in particular, and those enacted under Section 232 can continue until absolved by the president. Trump invoked the latter two in March and April, respectively.
Because Section 232 has no time limit, Johnson and Reisman agree it’s possible the trade war could continue until there is a change of power or “the economy starts responding,” according to Johnson.
Currently, revenues from tariffs go into the U.S. Department of Homeland Security budget.
Reisman said MetalMiner looks at three factors when determining the long-term metal market forecast: the U.S. dollar, China’s stock market and oil prices.
Although the U.S. dollar is making a comeback, Reisman said it still is short of being strong.
The Chinese stock market fell this year after reaching a peak, which Reisman said likely was caused by weaker GDP growth following tariffs.
“We look at China’s stock market because China produces half and consumes half of all industrial metals,” she said.
Reisman said the third factor makes all the difference for the 2019 outlook.
“We think the bull market is strong because oil prices are at $69 a barrel, and one-third of this index is based on oil prices,” she said, which drive transportation, energy and other commodities costs associated with the metals industry.
The industrial metal index — zinc, aluminum and copper — dipped last month, but Reisman said she thinks it’s a correction, not a sign of a bear market.
For 2019, MetalMiner forecasts a long-term average price of $2,150 per metric ton for aluminum, up from last year’s top price of $1,970.
Its long-term average price outlook for copper is $6,600 per metric ton, up from $5,500 in July 2017.
The average long-term price outlook for nickel is $14,800 per metric ton— a price at which MetalMiner encourages subscribers to lock in or consider hedging.
For zinc, MetalMiner’s long-term average price outlook in 2019 is $2,760 per metric ton, down from a peak of more than $3,500 earlier this year.
The average price outlook of $870 per metric ton for CRC steel in 2019 reflects the tariff-driven price increases, although Reisman noted the rate of the increase has slowed, and Q3 and Q4 prices tend to be lower.
MetalMiner predicts average prices for HDG steel in 2019 will be $970 per metric ton, and Reisman said that represents a stabilization from 2018.
Kallman said so far in 2018, tariffs on polyethylene (PE), polypropylene (PP), ethylene dichloride (EDC), polybutylene terephthalate (PBT) and polyethylene terephthalate (PET) had a $2-billion impact in each direction for chemicals/plastics as the U.S. levied tariffs and China retaliated.
Tariffs on polycarbonate (PC), nylon and acrylonitrile butadiene styrene (ABS) could have a further $16-billion impact on chemical/plastics imports and an $8-billion impact on exports.
Supply and demand for feedstocks and resins for the chemical/plastics industries — based off imports and exports and domestic demand — has been impacted by weather, plant outages, GDP growth and trade disruptions, Kallman said.
He expects prices for PE, PP and Nylon 66 to rise in 2019, with a pricing reversal for the latter late in the year as supply improves.
Nylon 6 pricing likely will remain flat in 2019, Kallman said, while ABS prices will be forced down due to competition in the Asian market.
Weigel, of AIT Worldwide Logistics, said supply chain volatility is considered “the new norm” in his industry — with tariffs being only one factor in play.
Others include pricing and volume trends by mode of freight — trucking, air or shipping — as well as recent regulations, driver shortages, and market disruption through digitization and autonomous/assisted vehicle technologies.
Factors putting pressure on air freight include Trump’s trade protectionism policies — tariffs and the withdrawal from the Trans-Pacific Partnership — potentially offset by Amazon and the e-commerce industry, which is projected to generate $3.5 trillion in global sales for 2019.
Weigel said AIT’s global transportation trends report shows an increase in demand has spurred growth across all modes of transportation — which is good for his industry but not good for the customers.
“We had a lights out on Aug. 23 because that was D-day for tariffs,” he said. “We had a number of Fortune 100 companies contact us then and say, ‘Move everything to air freight.’ It’s good for us but not good for their budget. We’re starting to see a sequential softening coming off of that Aug. 23 event.”
However, he said, the same effect will happen again due to “disruptive events” such as Apple’s global product launches or consolidation of ocean fleets.
He said AIT recommends that for 2019, customers need to “get closer” to their carrier partners and “start being more open-minded” about days and times for shipping of goods. And when they see a fair price for trucking, they should lock it in because 10 competitors are waiting in line behind them.
Customers also should expect higher U.S. trucking rates and supply challenges, as well as capacity constraints in U.S. trucking and air freight that will affect rates and service.
Weigel recommends all customers evaluate their exposure to risks stemming from trade protectionism and keep a close eye on new developments.