Commodities 2021: No respite for Asian commodity markets from geopolitical risk

Asian commodity markets are under no illusion that geopolitical risks will fade in the post-Trump era in 2021 but there is some optimism that it could be less unpredictable than waking up to prices moving on a single overnight tweet.

US-China tensions are unlikely to ease but could become less confrontational and transactional, transforming into a more systematic rivalry over issues ranging from human rights, technology, and in what could be the defining theme from 2021 — dominance of the new clean energy economy.

For resources companies, this could mean lesser volatility and trade flow disruptions from impromptu trade wars; but at the same time strategizing for a more structural long-term competitive landscape between Washington and Beijing.

The Biden administration is expected to make long-term climate change commitments, while China's next five-year plan will kick-off a decarbonization program to dominate global supply chains for new technologies, in what Ian Bremmer, head of consultancy Eurasia Group, calls a "clean energy arms race."

He wrote in his 2021 outlook that the energy transition will be "dominated by competition and a lack of coordination" and evolve into a "matter of industrial and national security policy."

"Across a range of clean technologies—but especially batteries, power control systems, and other commanding heights of the 21st century energy economy—China's longstanding industrial policy approach will be met by its new US counterpart across the Pacific," Bremmer said.

"Some parts of the clean energy supply chain will come under bifurcation pressures not unlike those seen in 5G, particularly where the security of ever-more complex grids is involved, such as with transformer equipment," he added.

But equally, climate change remains a global issue that needs consensus-building, not more unilateralism.

"There are deeper and broader significant geopolitical ramifications for the world of a Biden victory when it comes to U.S.-China relations," Ed Morse, Head of Commodities Strategy for Citi Research, said after the US elections.

"These could include a newly sparked partnership on climate change and a roll-back of challenges to a more global society, with a return to older rules of the road when it comes to trade, more broadly defined," Morse said.

SHADOWS OF TRADE WARS

More immediate concerns for 2021 center around the US-China trade deal, and not much is expected to change in the first half of the year.

"This is because both countries see pandemic control as the top priority, while Joe Biden's new government will also be busy with power transfer," Li Zhenguang, senior economist with Sinopec's think tank Economics & Development Research Institute, said.

Li said China will continue to buy US commodities despite taking longer to meet Phase 1 targets amid low oil prices, which Washington recognizes has been impacted by the pandemic.

"The volume of US crude inflows are driven more by prices than the trade deal, which is not really enforcement [of the trade deal]," Liu Yuntao, an analyst with Energy Aspects, said.

He projected US crude imports by China at around 400,000 b/d in 2021, compared with 353,620 b/d in January-November 2020, with Chinese refineries remain largely configured to process medium not light US crudes.

China's imports of US LNG in 2020 were the highest on record despite the trade war, but US cargo cancellations and delays for projects mean that China is no savior for US LNG exports.

For agricultural commodities and coal, China's ire has interestingly shifted to Australia, while US farm sales to China will likely remain strong in 2021, especially for corn and soybeans.

China has diversified its sources after imposing hefty anti-dumping and anti-subsidy duties on Australian barley, and Australian wheat exporters are understandably nervous as a bumper wheat crop is expected after three straight years of drought.

From an Australian perspective, the relationship with China is at rock bottom and the ban on thermal and metallurgical coal imports could be extended into 2021. Normally, China resets the coal import quotas in January and allows Australian imports to resume but that may not be the case this January as the two sides are barely speaking.

DESERT STORMS

Meanwhile, as Biden's foreign policy takes shape, oil market volatility is coming from the Middle East and Iran, even as both Riyadh and Moscow could see relations with Washington get less cozy.

S&P Global Platts Analytics said the key issue for oil markets will be the first few months of diplomatic engagement between Iran and the Biden administration, as well as Iran's internal politics ahead of its June 18 presidential election.

"Political constraints on both sides complicate the path to a comprehensive agreement, but limited oil export waivers are a plausible scenario in 2021. Sanctions enforcement could also become a lower priority for the next US administration," Platts Analytics analysts Paul Sheldon and Nareeka Ahir wrote in a Jan. 4 report.

They said Iranian crude supply growing further would not be a complete surprise and Tehran represents both the most bullish and bearish risks to oil prices due to a faster-than-expected return of Iranian barrels and a conflict involving Iran in the region.