Top five contrarian commodity scenarios for 2025: Russell

In 2025 it may be worth being a contrarian, since the year ahead could be one of most volatile ever, especially in commodities.

Donald Trump is back, threatening to disrupt the global trade flow with a wall on imports.

He will be able to do little this time, with a Republican-led Congress.

China is the second largest economy in the world and the biggest buyer of commodities.

The future of global energy transition is much more uncertain because of Trump's climate change doubt, the growing influence of right-wing parties in Europe and the public's increasing concern about the costs that they might be forced to bear as the world moves away from carbon-based fuel.

All of these factors could create a climate in which contrary ideas become reality. Below, I outline five of these scenarios. These are not my expectations for 2025. These are rather possibilities that deserve to be watched.

1. Trump is better than expected

In this scenario, almost everything works out for the new Trump administration. Tariffs are enough to make major trading partners give in, leading to the implementation of a few minor trade barriers.

The United States is still the economic leader of the world, and most of the rest rides on its coattails.

As Beijing's stimuli efforts finally pay off, inflation eases and monetary policy is relaxed. China now leads the Asian economic recovery.

The prices of commodities are also pushed up, except for crude oil which is likely to struggle due to an oversupply, especially if U.S. manufacturers increase production significantly, as Trump demands.

Trump could also reap peace dividends if he helps broker ceasefires between Ukraine and the Middle East. Even if this means giving in to some of the demands made by Russian President Vladimir Putin.

It would be bullish if Russian commodities returned to the market, as they are exposed to global economic growth. However, it could also be bearish if crude oil and natural gas were to return.

2. Trump is far worse than we feared

The Trump administration is following through with his most extreme threats. It has erected massive trade barriers, and has withdrawn from or undermined international treaties and pacts, including the Paris Climate Deal and the North Atlantic Treaty Organisation.

In this case, the global economy will suffer as countries struggle to reorder their trade flows and supply chain. Globally, inflation would likely rise and many countries' monetary policies may tighten as a result.

As demand for crude oil and LNG softens, commodities exposed to global growth such as iron ore and copper will weaken.

Copper's reaction after Trump's victory in the election was a preview, as London contracts dropped 7.7% the following week.

Bond vigilantes are also likely to punish Treasuries as a response to Trump's policy, especially if Trump combines large tariffs with tax cuts that increase the deficit.

The U.S. stock market may end up turning bearish, if Wall Street realizes that tax cuts won't be enough to offset the economic damage caused by tariffs.

3. China comes roaring back

Many Western analysts believe that China is now the sick man in Asia. A rebound in the Chinese economy would be a huge surprise.

It is possible, however, that 2024 won't be remembered as a time of economic decline. Instead it will be remembered as the year Beijing finally cleaned up troubled areas of its economy such as the financial situation of housing developers and the local governments.

Beijing could begin to see the fruits of these efforts in 2025. This will allow Beijing to concentrate more on increasing consumer spending and sentiment.

If China can also successfully navigate the policies of the Trump administration, it may change its approach to engage in a more constructive manner with Europe, and to build better partnerships with countries to the south. It could then find new markets for its energy transition technologies and product leadership.

Revitalised China is a boon to commodities like copper, iron ore and coal. But it may not be as good for crude oil given the rapid and ongoing switch from gasoline vehicles to electric ones.

4. OPEC+ begins to fracture

In recent years, the remarkable cohesion between OPEC, its allies and the group called OPEC+ has been a defining characteristic of crude oil markets.

The collective export body used production cuts to stabilize crude prices around $75 per barrel over the last two years. This may not be the price that some members would prefer, but it is still higher than what would have happened without production discipline.

The ongoing softening of demand and the Trump administration's plans to boost U.S. production may put more pressure on the unity of the bloc.

Some members may feel that it's better to cash in reserves sooner than later. This is especially true if they believe that China's switch to electric cars (EVs), which has been led by China, could be a juggernaut and upend the global energy market.

5. The United States is left out of the energy transition as it accelerates.

China's best way to counter any U.S. barriers on trade is by increasing its engagement with other countries. One of the best ways to do this is through expanding trade of manufactured goods like EVs and solar panels.

Energy transition could be accelerated by the cost-competitive Chinese products, combined with the willingness of buyers outside the United States in moving away from fossil fuels.

This scenario would see the United States further behind, as Trump's "America First", policy becomes America alone.

Copper, lithium, and other minor metals will benefit if the energy transition accelerates. Silver could also be a beneficiary, as it is used in solar panels.

In general, 2025 will likely be characterized by an initial period of uncertainty. This will then be followed by the markets adapting themselves to new realities. The past has shown that the initial volatility in price and volume does not last, and that commodity markets are very adept at adapting.

These are the views of a columnist, who is also an author.

(source: Reuters)