North Korea crisis casts a region-wide shadow over Asian commodities sector
Analysts warn an escalation in tensions would impact global demand for iron, gas
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. U.S. 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 on Thursday, the biggest increase since May.
The price of gold, considered a safe haven investment, rose more than $12 to US$1,285.40 an ounce by midday against the backdrop of heightened political uncertainty.
Analysts at Citibank warned in a note that the tensions centre on the 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), liquefied natural gas (54 per cent) and coking coal (52 per cent).
However, the analysts said 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 US$74.88 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 US$2.99 while coking coal prices sat around US$285 per tonne.
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,” the note said.