March 20, 2019

How will the commodities industry react to geopolitical tensions and technological innovations?

The commodities industry faces a difficult year ahead with an ever changing political landscape, a US - China trade war and the introduction of innovative technology: this will present new challenges, but also opportunities, for traders.

Is consolidation between the industry's leading players inevitable?

US - China Trade War

Despite a temporary ceasefire between the US and China, the reality is that many of the trade tariffs remain in place.  Most notably, the US-imposed tariffs target steel and aluminium imported from China, and the China-imposed tariffs target US agricultural and consumer products.

The US/China trade deficit hit a 10 year high in December 2018, when the import/export deficit increased to $491 billion.  Given the unpredictability of the Trump administration, it is not clear what this will mean for the commodities industry in the short, medium or long term.

Soya bean markets have been hit hard by Chinese tariffs, pricing the US out of the market, along with many of its other bulk crops.  Soya beans were the US top agricultural export to China in 2017, worth about $12.7 billion.  With an oversupply in the US due to the trade war, prices are likely to fall, and the US Department of Agriculture expects world soya bean stores to grow 9% on the year to 106.72 million tonnes in autumn 2019.  Traders are looking to fill the supply hole left by the US, with the likely winner being Brazil.

US oil exports are also in the midst of a drought.  Before the tariffs, China accounted for 20% of all US oil exports: this is now almost down to 0%.  Russia has benefited the most from China's ever growing demand for crude oil.  

Amongst the unrest and uncertainty, China and the US will each be looking for suppliers in different markets; and traders will need to be agile and responsive in order to capitalise in this volatile market.

Development of Technology

The development of technology such as the use of block chain is leading to a more secure and integrated supply chain, revolutionising the way products are tracked and approved, leading to a faster, cheaper and more secure way of settling transactions in all commodities, whether soft or hard. 

The technology behind block chain has the ability to cover many aspects of the supply chain, from financing to execution and logistics. The hope of moving away from the exchange of contracts and letters of credit by fax may soon become a reality. 

The traditional model whereby traders financed farmers, bought their crops, stored them and sold them is ceasing to exist.  Farmers have become much more sophisticated in a technology advanced world.  Farmers have access to market data, yield and weather reports, and as technology develops, farmers will gain greater control.  

Traditional commodity traders will be looking at forming closer ties with suppliers and investing in new technology, creating a more integrated and consolidated supply chain. 

Mergers & Acquisitions

Prices across the crops sector remain relatively low, as a result of record output of coffee beans from Brazil driving down prices, increased foreign competition from the likes of Argentina, Brazil and Russia, and ever thinning margins.  Soft commodity traders are likely to be forced to consolidate as they look to acquire market share amid an ever consolidated customer base.

The metals industry saw a record year in 2018 for M&A, with a total deal value of $53.4 billion, compared to $28.1 billion in 2017.  Deal value in Q4 2018 declined by 70% versus Q3 2018 to $5 billion; announced deals in 2019 suggest that this may be a temporary slowdown.

The remainder of 2019 will be interesting for the commodities industry as a whole as they look to tackle a heated geopolitical climate, ongoing demand for rare metals and increased price competition in the agricultural sector.  Consolidation may be the best way to tackle such issues for the bigger players but, as always, there will be opportunities for the more nimble.