Global Geopolitical Series: U.S. tariffs likely hit China’s gluttonous commodity appetite

Reports have come out suggesting that the Trump administration, as promised, is preparing for the next round of tariffs on Chinese goods worth $200 billion. The duo has already fired 25 percent tariffs on $34 billion worth of goods on each other and ready to slap 25 percent on another $16 billion. Most of the free market advocates and media analysts criticize President Trump’s decision by reminding the impact the tariffs would have on the U.S. economy.

However, little is being discussed of the impact on the Chinese economy. And, since the Chinese government hates bad publicity, the impact is not specially discussed in the Chinese media.

We believe that these tariff wars could have a more significant impact on the Chinese economy than it would have on the United States. Without the backing of the government, highly indebted Chinese companies are extremely vulnerable to this tariff war as their surplus capacity of many exported products makes China most vulnerable. For example, direct Chinese exports of Steel to the U.S. only accounts for 2 percent but China has the biggest global surplus production of Steel (approx. 100 million ton in 2016) and the knock-on effect would be extremely harmful. We expect a relatively sharp slowdown in the Chinese economy.

And a sharp China slowdown will hit the commodity markets like President Trump say ‘never before’. Why? Simply because China is the world’s commodity glutton. Below are the China’s approximate share in global commodity consumption,

Metallurgical coal - 73 percent

Aluminum -54 percent

Thermal coal - 50 percent

Nickel - 50 percent

Copper - 48 percent (copper concentrate imports hit a new record high of 17.35 million tons in 2017)

Zinc - 46 percent

Tin - 46 percent

Steel - 45 percent

Lead - 40 percent

Cotton - 31 percent

Soybeans - 25 percent

Gold - 23 percent

Corn - 22 percent

Wheat - 17 percent

Oil - 15 percent

Sugar - 11 percent

Natural gas  - 7 percent