Commodities Weigh Trump Win, Tariff Threats

Commodities reacted with trepidation to the election of Donald Trump to a second term as U.S. President, with most losing ground over fears the global economy will be hit by a new tariff war.

The downbeat reaction was in stark contrast to U.S. equities, which surged to record highs amid optimism that Trump's agenda of lower taxes will boost growth, at least in the United States.

The contrasting response to Trump's victory over Democrat nominee and now outgoing U.S. Vice President Kamala Harris showed exactly why the likely impacts of Trump's return to the White House are hard to assess.

Take crude oil for example.

The world's most important commodity dipped when it became clear that Trump would prevail in Tuesday's vote, with global benchmark Brent futures LCOc1 dropping as much as 2.9% during Wednesday's trade, before ending the down 0.5% at $75.16 a barrel.

In theory, Trump's energy policies should be somewhat bearish for global oil prices, as he is in favor of loosening regulation of the sector in the United Stares, and encouraging even higher output in the world's biggest crude producer.

In practice, U.S. oil output may not move much higher, given it is already at record levels and companies will be wary about boosting production if they believe the impact will be to weaken prices further.

Trump has also promised to bring peace to the Middle East, without specifying how this will be accomplished. But on the assumption he is able to convince Israel to end its conflict with Iran and the groups it supports, such as Hamas and Hezbollah, this would be bearish for oil prices as the geopolitical risk premium would dissipate.

Trump's affinity for Russia's President Vladimir Putin, and another unspecified promise to end the Ukraine conflict, may also result in easing sanctions against Russia, which in turn may boost its exports of crude oil and other energy products such as liquefied natural gas and coal.

On the other hand, Trump has made it clear he aims to go hard against Iran, and may try to tighten sanctions against Tehran, which in turn may make it slightly harder for Iran to sell its crude.

Trump's plan to impose tariffs of 10%-20% on all U.S. imports, and up to 60% from those from China, is also likely to hurt crude prices, given it would likely curtail global trade, leading to slower economic growth and the risk of higher inflation and interest rates.

Overall, the main risks for crude appear to be to the downside, complicating the task for OPEC and its allies in the wider OPEC+ group to set a production policy that tries to keep prices high enough, without the group having to give up too much market share.

LNG is another commodity that in theory may face a more bearish outlook under Trump, given his support for expanding U.S. production and the construction of new export plants.

But again, much will depend on Trump's trade policy.

If comprehensive tariffs are placed on all imports into the United States, it's likely that countries will respond with tit-for-tat tariffs on their imports of U.S. goods.

This means that U.S. LNG, and indeed crude oil and coal, may cost more than alternatives, meaning that U.S. producers may have to discount prices to remain competitive, or hope that tariffs aren't placed on their products.

METALS STRUGGLE

The prospects for industrial metals appear bleaker than for energy commodities, especially since they are more exposed to China, the world's biggest buyer of copper and iron ore.

London copper contracts CMCU3 slumped 4.1% on Wednesday, ending at $9,343 a metric ton, the weakest close in nearly two months.

Singapore iron ore futures SZZFc1 fared somewhat better, but still ended down 1.2% at $104.16 a ton, while zinc contracts in London dropped 4.2% to $2,973 a ton.

Iron ore is the key raw material used to make steel, while zinc is mainly used to galvanise steel.

Both are heavily exposed to China, and therefore face the prospect of lower demand if exports from the world's second-biggest economy are hit by Trump's planned tariffs, and the likely accompanying slowdown and re-ordering of global trade.

Another commodity that is likely to play a wait and watch game is gold, with the spot price XAU= dropping 3.1% on Wednesday to end at $2,659.24 an ounce.

The decline was largely because of a surging U.S. dollar, but gold also faces contradictory pressures from a Trump presidency.

Higher bond yields and interest rates, caused by Trump's likely inflationary tariffs and tax cuts, will cut the appeal of gold.

But the precious metal may also benefit from the possible volatility of a Trump presidency, which may heighten geopolitical risk and encourage investors to diversify assets.

Overall, Trump's second term comes with more downside risks for commodities, but much will depend on how much of his economic and political agenda he is able to implement, and how quickly it is done.

The opinions expressed here are those of the author, a columnist for Reuters.

Source: Reuters