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The Macro Brief – Commodities, tariffs & trade
445 Plays18 hours ago
Paul Bloxham, our Sydney-based Chief Economist for Australia, New Zealand and Global Commodities, drops by the London studio to discuss how tariff uncertainties and global growth worries are affecting commodity prices.
Disclaimer: https://www.research.hsbc.com/R/101/2scKXzM
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Transcript
Introduction to Global Insights
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on the 6th of June 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to media player. And remember to like and subscribe to The Macrobrief wherever you get your podcasts.
Impact of Trade on Commodity Prices
00:00:44
Speaker
Hello, I'm P.S. Butler and this is The Macrobrief, where we look at the issues driving financial markets across the globe. And this week, and I have a special guest with me in the studio. All the way from Sydney, I'm joined by Paul Bloxham, Chief Economist for Australia, New Zealand, and Global Commodities.
00:01:00
Speaker
And it's that last part of Paul's title that we are talking about today, commodities. Commodity prices have been firmly in the spotlight recently, and tariff uncertainties and global growth worries have only sharpened the focus.
00:01:11
Speaker
Paul, I know you have a busy schedule meeting clients, so thanks very much for talking to me, and welcome to the Macrobrief, or should I say, good day. yeah Yes, it's great to be here. And yes, you should say good day. So you published your Global Commodities Review back in March.
00:01:25
Speaker
And you were already flagging the impact of Trump's trade policies. We then had Liberation Day, pauses, more announcements, more pauses. It's hard to keep track. Where do we stand today?
00:01:36
Speaker
And what has the impact been on commodity prices over that period? Yeah, you're right. So Trump tariffs and trade, that's what we called it. And that's because, of course, we thought that was front and center in terms of what it was going to mean for both global growth and and of course the commodities outlook as well.
00:01:50
Speaker
And I think you know we've we've gotten a lot of the results that we expected. We've seen commodity prices come down since Liberation Day, ah not as much perhaps as ah you know in an aggregate sense as as people had been expected. They're down 4% for what it's worth from the 2nd of April.
00:02:06
Speaker
But the thing is, underneath that, there's a compositional story where you've seen metals prices come down, you've seen oil prices and energy prices generally come down by more, but of course you've got gold prices that have gone up. So in that aggregate index, there's quite a lot of divergence. But I would say in broad terms, so you know the the effect of this in terms of increasing uncertainty and creating downside risk to the global growth story is is the main feature of what's driving commodity prices to come down, and that's that's what we had anticipated.
00:02:33
Speaker
And so you've more recently published Commodity Price Snapshot and in that you identify three economic effects of this trade uncertainty. Can you break it down for us?
Economic Effects on Global Growth
00:02:43
Speaker
Yeah, so I think one way I approach this is, as an economist at least, is to try and say the things that you think you know. Whereas, you know,
00:02:50
Speaker
Like, we don't know what's going to happen every day and what the Trump administration is going to deliver. It's very volatile. But I think there are three key things. Firstly, there's been an uncertainty shock delivered to the global economy from basically the 2nd of April onwards, but since then. And uncertainty is still very, very high.
00:03:05
Speaker
And uncertainty is bad for growth. you It makes it difficult for businesses to make and decisions about hiring and investment and it weakens growth. So I think that shock's already been delivered. Secondly, we haven't seen it show up in all the economic indicators yet because there's been massive front-loading. you know Businesses have been getting ahead of the arrival the expected arrival of these tariffs by importing more and on the other side of that you've got exporters out of Asia in particular and they've been producing more and consumers too I think have been you know front-loading their spending ahead of the expectation of tariffs rising and prices increasing. and then So if you put those two things together, I think you're going to get a rollover, you're going to get a slowdown, a decent slowdown in growth in the second half of this year from those two factors.
00:03:43
Speaker
And wherever we land, the third one that we sort of work work with is tariff rates into the US are going to be higher than they were prior to the 2nd of April. The question of how high is is the one that's hard to know and hard to answer, but that's going to be disruptive for global activity. So I think you add all that together, it's downside risk for global growth. And that, in our view, is downside risk for most of the commodities, not gold, but but most of the commodities.
00:04:06
Speaker
Talking about most of the commodities, in your experience, do they lead or lag? I mean, what kind of signal are they giving you? I mean, we saw the OECD revising down their estimate for global growth. Look, my experience is that mostly these are fairly contemporaneous indicators of what's going on. You know, for years we've described, ah you know, always typically it's typically described that that copper is a good signal of what's going on in the global economy and they refer to something called Dr. Copper, you know.
00:04:33
Speaker
it's telling you how the global economy is likely to travel. It's such an integral commodity in all sorts of products um that that it's that's been this sort of cyclical indicator. and But it's not so much that you look at it to say, hey, this is giving you a lead necessarily. It's to say, this is what's going on right now.
00:04:48
Speaker
right And so I think that's that's that's what we we think commodity prices largely do. They're sort of largely contemporaneous rather than something that's giving you a really solid lead on what's going on. Copper, I think recently, for what it's worth, is is breaking down in terms of being that useful indicator that it was. And to me, the primary story here is is the energy transition. So you've got this big structural story that's sort of meaning that the copper price doesn't necessarily track ah the activity and as as easily. It's more driven by this sort of fundamental change in what we need the products we're needing and and and the materials we're needing to
Gold as a Safe Investment
00:05:22
Speaker
make them.
00:05:22
Speaker
Talking about traditional indicators, is gold a traditional indicator of uncertainty? mean, it certainly seems to be, doesn't it? Absolutely. so And I think this is this explains why we are where we are right now. Gold prices have been you know getting to all-time highs, and and I think that's a high reflection of all the uncertainty that's coming out of the the Trump policy changes.
00:05:43
Speaker
um but But I think also, so so it is an uncertainty story, um but it's also, you know, in this question that's being asked about how, whether the US dollar's going to weaken further and how you know much investors should hold in in in US government bonds because they maybe they're not quite as risk-free as they were, well, you're looking for alternatives and gold is one of those alternatives. And so, you know, I think that's that's what we're seeing in terms of what's been pushing the gold price to these high levels. And we've seen this at central banks in particular buying.
00:06:11
Speaker
So central banks are buying gold, but you know it it it does extend beyond that. It's not it's it's global investors wanting to hold more more more gold, and that's putting upward pressure. And I think, to your point, it's it's absolutely a reflection of a highly uncertain environment, and I guess a shift in the way global investors perceive a risk and and where the risks are, and perhaps less willingness to want to hold US sovereign assets.
00:06:35
Speaker
Coming back to your global commodities outlook, ah one of the themes, you had 10 themes in there, we're not going to go through all of them, but one of the themes I was intrigued about was that you identify increased commodity market fragmentation.
00:06:47
Speaker
What's that in plain English? Yeah, in plain English, it's that there you know we we so like to sort of think that there's one price for any product, but there isn't always. And and you know sometimes there's a price in one market and a different price in another.
00:07:01
Speaker
um And for example, the copper price at the moment is a lot higher in the US than it is outside the US. And that's partly reflecting that in in anticipation of tariffs that might arrive, and but you know there's been this big move of copper into the US market. And so that market has become fragmented. you know you you can one the The gap between the sort of onshore price in the US versus ah the other price is much, much larger than it's normally been.
00:07:24
Speaker
And you're seeing that fragmentation across other markets as well. So for steel prices, for aluminium as well, And so, you know, that that that's what we mean by fragmentation. yeah You can take it one step further. There's quite a lot of commodities that aren't exchange traded, right, and and aren't in deep liquid markets. And of course, those markets are often quite fragmented. But that fragmentation has risen because of ah the sorts of things that are being delivered by the Trump administration.
00:07:49
Speaker
One of the commodities or set of commodities that isn't exchange traded is critical minerals and rare earths. And there's been a lot of headlines about that. How should we think
Rare Earths in Trade Negotiations
00:07:59
Speaker
about those? Well, the first thing I would say is this. And there's this sort of you critical minerals, if you look at the US definition of it, and they've launched an investigation into it, is this really, really long list of different commodities. And so it actually almost covers the whole basket. you know that's so so that's what the way they've been describing it.
00:08:16
Speaker
But within that, of course, what you're really getting at, I think, is rare earths. Now, rare earths are a very, very specific type of commodity. And it's low. We're talking about low volumes, aren't we? very low volumes. you know I think that the globally traded amount of rare earths is less than 1% of globally globally traded oil, for example. So it's like a small category.
00:08:34
Speaker
But it's a small category that's super super important, right? um These rare earths are used for producing make magnets. um They go into electronics. They go into military hardware. um There's this whole long list of, you know, 17 obscure rare earths that are part of the story.
00:08:50
Speaker
And so, like, they're I guess the the size of that market in terms of what's traded by value doesn't really reflect their importance. They are... you know, if you haven't got them, it's not going to be you're not going to be it's not going to be possible to produce some of the things that we do, electronics that go into, you know, ah including including phones and so on, but also the magnets in military military hardware and so on. So they're really important and they're becoming, of course, a trade negotiation tool. And that's the main thing. They are largely produced in China. but you think that Do you think that the situation where people are worried about the supply from China, demand will discover more rare earths elsewhere? I mean, it's often the case with mining. It's not something that's easily substitutable quickly.
00:09:28
Speaker
that's That's the answer. you know Over time, you can start to shift things, but it's not easily substitutable quickly. So it is actually a genuinely useful tool in a trade negotiation setting. An important
Climate Change and Agriculture
00:09:39
Speaker
one.
00:09:39
Speaker
Finally, we should talk about agricultural commodities. Cocoa beans, I looked at your chart, are up. Palm oil has collapsed. What's going on? There's a lot of really interesting things in all the agricultural commodities, but I mean, the two you picked out, I mean, so cocoa has been actually at extraordinarily high levels. You know, I think we looked i looked at the numbers just before this and they're 300 percent higher than they were in their pre-pandemic average.
00:10:02
Speaker
um And so very, very high, and you're seeing it reflected in in chocolate prices as well because that's where where where this this product is used. um And that reflects that there you know has been very inclement weather in the of what is a very sort of narrow geographically, you know, sort of exposed area so it's West Africa and the vast vast majority of the global production is just in this small in this you know in that particular area so it's weather related effects that have constrained supply um and I mean this is the story about commodities in general you can talk about big demand factors but the primary thing is often sort of individual idiosyncratic supply disruptions and so that's happened for cocoa and they're at high levels you could say something similar for coffee which has been at high levels orange juice although those prices have started to come down recently because
00:10:47
Speaker
There was quite sort of extreme weather that was disrupting supply. ah We were talking about the fact that olive oil prices have been very high because they had drugh very dry conditions in Portugal and Spain in recent times, and that's damaged crops as well.
00:10:59
Speaker
Palm oil um is, I guess, the other end of the spectrum where you've had pretty decent supply. It's mostly produced in Malaysia, and they've got inventories that are climbing quite quickly, and that's put downward pressure on on palm oil prices recently. so ah In the ag commodity space, there's there's all these divergent supply stories and they're often driven by weather.
00:11:18
Speaker
um Geographical concentration is important as well. And I think the main thing we've been pointing out is you know that combination is going to become even more problematic as the climate continues to change. So it's a real clear evidence that climate change is having an impact.
00:11:33
Speaker
Yeah, and and the fact that we are, you know, where the climate change can have its sometimes its most distinct effect is where you're highly reliant on a particular region that produces a particular thing globally, and the whole supply chain is sort of tied to that.
00:11:45
Speaker
You disrupt that, and suddenly, well, you've got a problem, but you can't fix it quickly. I mean, to your point about rare earths, but, you know, it's a sort of similar similar narrative. but But for agricultural commodities, it it it really is a story for a lot of these sort of types of i think come on I think I'll be stocking up on on chocolate bars.
00:12:01
Speaker
Finally, and before you go, and I know you took time out from your busy marketing schedule to come and talk to us in the studio, ah but how's it going? What are clients asking you? What what are
Ongoing Trade Uncertainty
00:12:13
Speaker
they worried about? are They're watching what the Trump administration is delivering.
00:12:16
Speaker
I think one of the really big themes is is the question around about about the U.S. dollar and and and where to diversify out of it to the extent that that's the story, how much the U.S. dollar might weaken,
00:12:28
Speaker
you know, what happens if we do go into a global downturn to the normal correlations where, you know, typically a global downturn drives money back into the US s dollar, it drives it back into US government bonds. Does that play ah it play out in the same sort of way? And I guess then then what does that mean for everyone else? Like, what does it mean for EM and what does it mean for the EM story? What does it mean for commodity markets that, that that you know, and and and commodity producers and so on? So so I think that's been a a big part of the conversation that I've been having with clients over the past week up in here here in Europe.
00:13:00
Speaker
do you think Do you think they've become a bit more used to all this trade disruption? There is a sense, a little bit at the moment in the market, there's been so much that everybody's become sort of almost desensitized to it. Well, I would warn against that. I mean, I think that's the point that I'm making is that um yeah We've become a bit desensitized because because it's, as you say, sort of chop and change here and there, but there is some really big picture things we can step back and say. We can say uncertainty is high and that's bad for growth.
00:13:25
Speaker
We can say the growth hasn't fully showed, the the indicators haven't fully showed that downturn yet and that's partly this front-loading effect. And so we can say once those two things unwind, you're still going to be in an uncertain environment. That's going to weaken growth. So I would ward against being, you know, sort of being too sanguine about the risks here.
00:13:43
Speaker
Well noted. I think that's all we've got time for today. Paul, thanks again for coming in. Thank you.
HSBC Research and Investment Themes
00:13:52
Speaker
Elsewhere in research, we've published the latest edition of Talking Points, our monthly look at the key reports covering our nine key investment themes. Included this time are pieces on China's pension reform, the latest developments around US tariffs, plus looks at artificial intelligence, clean tech, and the net zero transition.
00:14:12
Speaker
Korea has ended a period of domestic political turmoil with the election of a new president. For more on that, listen to our sister podcast, Under the Banyan Tree, where economist Jin Choi and strategist Prona Garg discuss the implications of the result for Korea's economy and markets.
00:14:29
Speaker
And finally, remember that HSBC clients can keep up to date with our latest research by downloading our app from Apple's App Store or Google Play. And if you have any questions or comments about anything we've talked about today, you can email us at askresearch at hspc.com.
00:14:47
Speaker
So that's it for this week's macro brief. If you've enjoyed today's podcast, then please like and subscribe and share it with friends and colleagues. Thanks very much for listening, and we'll be back next week.
00:15:16
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.