The U.K. decision to quit the European Union probably sparked the country’s biggest impact on global commodity markets in decades. It may not last.
While the surprise result of the June 23 referendum sent gold surging and oil plunging — and disrupted world stock, bond and currency markets — the U.K. hasn’t mattered much to the commodity world in a long time. Back in the days of colonial empire, everything from tea to copper was priced in the British currency, the pound, making it a global benchmark. That’s no longer the case. Today, almost every major commodity is sold in dollars.
The prospect of life outside the EU has weakened the pound and raised questions about the British economy for companies reconsidering whether to do business there, which could hurt trade with other countries. But that probably won’t significantly alter the global supply and demand of raw materials, because the U.K. isn’t a major buyer or producer. The country ranks 15th among the world’s oil consumers, isn’t a major user of base metals, and trails most of the top growers of grain, industry data show.
“Commodities aren’t the immediate focus,” said Paul Horsnell, head of commodities research at Standard Chartered Bank in London.
As recently as the 1980s, British politics and economic policy played a more significant role in valuing the world’s raw materials. Commodities including copper, nickel, zinc, robusta coffee, tea and cocoa traded in pounds and were market benchmarks. Today, oil, natural gas, electricity, metals — including zinc since 1988 and copper since 1993 — and nearly every agricultural commodity are priced in U.S. dollars.
Even black tea — the quintessential British beverage — trades in dollars, after the London market closed in the 1990s and trading moved to Mombasa, the commercial port city of Kenya. Only cocoa futures in London are priced in pounds, though the same commodity trades in New York in dollars.
That doesn’t mean Britain’s decision to leave the EU — dubbed Brexit — will have no impact, especially if it means slower growth around the world as businesses delay investment decisions. The U.K. has the world’s fifth-largest economy, and London has been a global financial hub for decades. The vote already has led investors to unload assets perceived as more risky — a category which usually includes raw materials.
‘Investment Drag’
Brexit could create an “investment and spending drag,” particularly in Europe’s $13 trillion economy, said Saad Rahim, chief economist at commodities trading house Trafigura Group Pte. in Geneva. “The U.K. itself is not a global giant in terms of commodity demand, but there is an interplay between the U.K. and the EU.”
Few analysts expect any major long-term impact, though the actual process of leaving the EU may take years and the specific conditions of that departure aren’t yet known.
“We expect the effects to be relatively modest unless the vote triggers a broader macro-economic meltdown,” said Richard Mallinson, geopolitical analyst at Energy Aspects Ltd., a London-based consultant.
Global demand for oil, the biggest commodity by value traded, probably won’t be affected much, according to the International Energy Agency.
Fundamentals Unchanged
“The fundamentals of demand and supply remain unchanged,” the Paris-based agency said Friday, after the tally of the U.K. referendum showed 52 percent of voters supported leaving the EU. Earlier this month, the IEA said that the global oil glut that had sent prices plunging over the past two years was ending, with supply and demand coming into balance.
“These distractions have little to nothing to do with tightening oil and gas macro fundamentals,” Tudor, Pickering, Holt & Co., the Houston-based oil investment bank, told clients in a note. “Nothing in this result changes the structural realities of solid global demand and challenged supply.”
While the pound plunged to the lowest in more than 30 years on Friday, Brent crude oil, the global benchmark, posted its biggest drop in four months. Over the last five years, prices had bigger one-day swings about two dozen times. Brent for August settlement fell 41 cents, or 0.9 percent, to $48 a barrel on the London-based ICE Futures Europe exchange as of 8:22 a.m. Singapore time.
Similar moves occurred in metals and agricultural markets. Of the 21 items tracked by the Bloomberg Commodity Index, each fell less than 5 percent Friday, as gold and silver advanced on buying by investors seeking a haven. The index fell 1.6 percent, less than it dropped several days in January and February, when commodities prices collapsed.
Still, even a short-lived drop in prices is a major setback for commodity markets that still haven’t recovered from the recession in 2008. Glencore Plc, the world’s largest commodities trader, fell 8.8 percent in London.
