Analysts anxiously watching commodities
Price of iron ore, crude oil and other commodities to take a hit if North Korea crisis escalates: Citibank
As nuclear rhetoric between North Korea and the United States heats up, Citibank analysts are anxiously watching commodity prices due to the importance of the North Asian market.
Global commodity markets have so far not priced in geopolitical risks even as North Korea threatened to launch ballistic missiles into waters near the American territory of Guam. President Donald Trump warned there would be “fire and fury ” against the North if it continued to threaten the U.S.
The VIX, a measure of how much volatility investors expect in stocks, jumped 25.2 per cent, the biggest increase since May on Thursday. The price of gold, considered a safe haven investment, rose more that $12 to $1,285.40 US an ounce by midday against the backdrop of heightened political uncertainty.
While a physical confrontation remains unlikely, analysts at Citibank have warned in a note that the tensions centre on a crucial commodity import hub of China, Japan and South Korea and any escalation would be worrisome for global trade.
Those three countries account for more than half of global demand for three major commodities: Iron ore (84 per cent), liquified natural gas (54 per cent) and coking coal (52 per cent). However, the analysts noted that escalating tensions would likely hit South Korea and Japan harder than China due to their closer proximity to the rogue nuclear power.
Prices of iron ore Thursday were up slightly to $74.88 US per ton, hovering around a four-month high as demand from China’s construction industry drives a boom. LNG prices were up 3.7 per cent to $2.99 US while coking coal prices sat around $285 US per metric ton.
In addition to those key commodities, copper, crude oil, nickel and thermal coal prices could take a hit if demand drops in that region, which accounts for as much as 50 per cent of global demand in those markets, the note said.
In addition, the countries do export small amounts of nickel, copper, diesel and lead, Citibank said.
“Asia, and particularly North Asia, has a huge commodity deficit but a big push into downstream industries — where the countries are importing raw commodities and processing them e.g. refining or smelting — means that regional exports also contribute to global commodity trade.”