Commodity finance bankers in Asia are shrugging off concerns of a potential trade war, despite US President Donald Trump slapping huge tariffs on steel and aluminium imports.
Trump’s actions are being perceived as the opening shots of a long-awaited conflict, as his administration seeks to redress the trade imbalance the US faces overseas, particularly against economies in Asia.
Concerns are mounting that other countries will retaliate with countermeasures, with leaders across Asia Pacific, the Americas and Europe forcefully criticising Trump’s measures.
But those that bank the metals business in Asia remain sanguine. They are confident that, at least for now, Trump’s actions will have minimal impact on their business, or on the business of the traders they fund.
“We’ve been monitoring the situation closely but realise that over the past year and a half, a lower and lower share of metals exports from Asia in general, but especially China, are going to the US. When you look at the steel markets, China has slightly increased its production overall, but at the same time the total exports decreased to 70 million tonnes, and within those 70 million the share of exports to the US was really minor, we’re talking something in the range of 2%,” says Eugene Ganchev, head of energy and metals commodities at ABN Amro in Asia Pacific.
A 20% tariff is set to be placed on steel imports to the US, with aluminium goods facing a 10% levy. The move has alienated the more pro-trade factions in the Trump administration, with top economic advisor Gary Cohn – a former Goldman Sachs chief operating officer – tendering his resignation, allegedly in response. Meanwhile, senior Republican Party figures, including house speaker Paul Ryan and Senate leader Mitch McConnell, have hit out at Trump for introducing protectionist measures.
But in Asia’s trade finance markets, there are other areas of Trump’s policies that raise more immediate concerns.
“I wouldn’t say right away we have any concerns, but it’s very early days. We’ll have to see how this whole thing pans out,” Aziz Parvez, Bank of America Merrill Lynch’s head of trade and supply chain finance in Asia Pacific, tells GTR.
He adds: “I would say something like the tax reform would be more significant, because that would lead to a flow of money out of the region and less liquidity in the market. The interest rate hike, that’s more relevant as it means movement of money out of the region and back to the US. Those could have more of an impact on pricing than just the change in the tariff.”
Those in the structured commodity finance space are likely to be even less exposed to the tariffs, due to the longer-term nature of the deals.
“Flow business depends a lot on the prices. But structured commodity finance is more stable, this is medium-term business. Deals get recycled and, as a result, it’s much less exposed to price volatility. If it spreads to many other markets then maybe, but at the moment, I don’t see how this would impact our business,” Momchil Ivanov, who heads ING’s structured metals and energy finance team in Asia, tells GTR.
If there was an escalation that seriously hampered the flow of commodities from Asia, then there is likely to be a shift in mindset. Despite the focus on China, it’s the EU and Canada which are the largest providers of steel products to the US, so they will likely feel the impact first and are thought to be preparing retaliatory measures.
China, on the other hand, has already said that it has found evidence of dumping of styrene imports from the US, a chemical which is essential in the manufacturing of many plastics. The Chinese government has called for tariffs of between five and 10.7% on styrene imports.
In the case of a full-blown trade war, banks could be expected to reassess the metals they are funding, says Carlos Casanova, Asia Pacific economist at Coface.
“Banks will continue to finance metal markets as there is some momentum behind fundamentals. Steel prices increased quite significantly in 2017, which is still reflecting positively in company earnings, profits and valuations. However, risk-off modes call for a more cautionary approach, requiring banks to trim limits and provide less favourable terms,” he says.
For now though, the mood among the sector is sanguine. Prices have rebounded from the lows of 2016 and books are up across the board in Asia Pacific. However, if the measures start to bite the relatively exposed economies of Japan and South Korea, then the atmosphere may quickly change.