Things are always uncertain to some extent – especially in the commodities world where unexpected outages, industrial action, accidents and so forth can disrupt supply chains. These days however, it seems that uncertainty is the norm. Tariffs, threats of tariffs, sanctions on individuals and countries, BREXIT and political chaos have risen geopolitical risk to the forefront in recent months and years. The well documented issues around Rusal are just the tip of the iceberg and increasingly, the commodities media is beginning to focus on this unprecedented uncertainty. It must be giving some traders a right royal headache! As I write up the disruptive technology report, I am also struck by all the other significant changes happening in the industry from renewables to regulations. Not to mention technology shifts.
Of course, all of this uncertainty and change can disrupt and create issues for some but it is also an opportunity for others. The Reuters story yesterday demonstrates how the Rusal fiasco has created profit and opportunity for some. “Surging volumes and volatility in industrial metals so far this year, largely due to U.S. sanctions slapped on Russian aluminum producer Rusal, have been a major money-spinner for several brokers and banks after years of tepid market conditions,” said the opening to the story. “Business has been very, very good for anybody in our shoes that thrives on volatile markets. Trump talking about sanctions on Rusal was enough to really blow the market into the stratosphere,” said the head of metals at an LME broker, who declined to be named. “But anybody who’s involved in the risk side of things, the market-making side of things, would have had an incredible scary ride through April.”
Meanwhile, in an April presentation, OCBC bank examined the potential consequences of a full out trade war between the US and China stating “should trade tariff proposals turn concrete, we opine that growth-related commodities could potentially trend similarly to a growth-recessionary year (crude oil, base metals: – 10% to 30%), while safe haven demand into gold will lift the yellow metal beyond $1,600/oz. Impact on agricultural will likely be mixed, as crude palm oil could find favor with Chinese importers, while soybean prices could potentially fall as demand slackens.” The Tax Foundation believes the tariffs could have quite an impact on the US economy too stating “According to the Tax Foundation model, the tariffs enacted so far by the Trump administration would reduce long-run GDP by 0.06 percent ($15 billion) and wages by 0.04 percent and eliminate 48,585 full-time equivalent jobs. If the Trump administration enacts additional tariffs on automobiles and parts and additional Chinese tariffs, GDP would fall by an additional 0.3 percent ($82.3 billion), resulting in 0.2 percent lower wages and 255,283 fewer full-time equivalent jobs,” pointing out that tariffs raise prices and stymy economic growth.
So, while the bumpy ride of uncertainty has both an upside and a downside, the end result may well be a downturn in growth and demand for raw materials. We will see.