How the trade war is affecting iron ore copper and miners

The inauguration of US president Donald Trump in 2017, saw a new wave of trade protectionism manifesting. Trade agreements with NAFTA (North American Trade Agreement) have been renegotiated and Trans Pacific partnerships dismantled. The recent most significant trade war narrative began in 2018 as the US started to increase tariffs on China and the European Union.

Chinese trade data has shown a clear but lagging effect of increased tariffs imposed by the US on imports from the region. Markets are now anticipating some progress in talks as the US and China look set to sign a ‘phase 1’ deal.

Iron Ore

The US is not a major importer of Iron Ore from China, although it does source more steel variants (in terms of value) from the region rather than from any other country in the world. Iron ore is the primary ingredient used in the making of steel.

The price of iron ore has however skyrocketed in the first part of 2019 reaching a multi-year high in July. The catalyst for gains, a result of supply disruptions from manmade disasters as well as forces of nature. Tropical storms off the west coast of Australia and the collapsing of tailing dam walls in Brazil, have seen output curbed by major producers of the metal, including The BHP Group, Rio Tinto and Vale Inc.

The price of iron ore has since undergone a major correction in the later part of 2019, following the revival of previously disrupted supply and a breakdown in trade talks in May.

Currently we see the iron ore (priced in Renminbi) trading in a broad range between the 580 (support) and 680 (resistance) levels. The commodity price has recently reversed off support of this range with 640 an initial target. A close below the 580 level would assume the range trade to have failed and suggest further weakness for the commodity price.

Companies such as The BHP Group, Anglo American Plc, Kumba Iron Ore, Rio Tinto and Fortesque Metals are the worlds largest listed producers of iron ore. These companies derive a large proportion of earnings from the commodity and would therefore see their respective share prices sensitive to movements in the underlying price.

Copper

Copper is often considered a leading indicator for economic health. The digression of trade talks in May this year, was met with a sharp decline in copper on the expectation of lower future demand for the metal, along with the forecast of lowering global economic activity by markets. Copper has since started to rebound in October in lieu of the suggested trade progress and positive assumptions relating towards global economic growth.

Following a downtrend, the copper price has consolidated into a range between the 5615 (support) and 5970 (resistance) levels. The consolidation resembles that of a double bottom formation, highlighted with the blue ‘W’ on the chart above. A price close above the 5970 level would confirm the pattern and suggest a change in directional trend from down to up. In this scenario 6180 would become the initial upside target. Failure to break this level (5970) would assume the sideways consolidation to be continuing rather than the trend reversing.

Major listed copper producers which will be influenced by movements in the copper price include Freeport-McMoRan, The BHP Group, Xstrata, Rio Tinto, Anglo American Plc and Glencore.