Beyond the short-term volatility as investors become used to the idea of President Donald Trump, the main risk for global commodities is how much of the campaign rhetoric translates into policy reality when the Republican victor moves into the White House.
The problem global commodity markets are currently grappling with is that the new U.S. president hasn’t articulated well-defined policies, rather his campaign was a series of slogans, threats and somewhat vague promises.
Nonetheless, there is enough to suggest that Trump’s presidency holds both positives and negatives for commodity demand and prices.
Much of the focus so far has been on what his domestic energy policies will bring, but whatever changes will be much more of an issue within the United States and will likely only have a limited impact on the rest of the world.
His stated aim is to allow the market to decide which energy sources it will use, and to free up exploration, production and transportation from red tape.
On the surface that would be positive for oil and natural gas output in the United States, perhaps less so for coal as it would struggle to compete with higher, and likely cheaper, natural gas output.
Globally, this only becomes significant if the United States ramps up exports of crude oil, refined products and liquefied natural gas (LNG).
Much more important for the global commodity outlook are Trump’s policies on international trade.
If he carries through his threats to impose tariff barriers on manufactured goods from China and any other country deemed to be acting against his “America first” policy, it will be negative for commodity demand.
Hardest hit would likely be bulk commodities such as iron ore and coal, as well as industrial metals such as copper and aluminum.
These commodities form the basis of many manufactured goods and their related transport systems, making them exposed to any contraction in global trade sparked by Trump’s policies.
It’s also highly likely that if the United States does start to raise tariff barriers, trading partners will respond with barriers of their own, which would have a significant impact on the flow of goods and services, especially in the Pacific area.
The positive potential of a Trump presidency is higher commodity demand on the back of increased domestic infrastructure spending.
Trump gained victory over Democrat Hillary Clinton largely by winning the so-called rust belt states, such as Ohio, Pennsylvania and Michigan.
He did so on the promise of reversing the loss of jobs in these states caused by the shuttering of factories that were unable to compete in a more globalized economy.
However, trade barriers are unlikely to bring manufacturing jobs back as investors would likely be reluctant to commit capital to manufacturing ventures that are only viable on the back of protection.
This means Trump, if he wishes to repeat his victory in four years’ time, will have to bring employment back to these states.
That most likely means infrastructure spending and Trump has indicated he plans a $500 billion program during his first term.
That sounds positive for commodity demand, but it will also likely lead to higher fiscal deficits, rising inflation and therefore higher interest rates.
In fact, Trump’s trade policies will also stoke inflation and likely boost the U.S. dollar, not only from likely higher U.S. interest rates but also as lower commodity demand hurts emerging market currencies and those in developed economies that are exposed to commodities, such as Australia and New Zealand.
But there is a massive caveat to the likely implications of a Trump presidency. Will he be able to implement his ideas or will the reality of governing force a more moderate response?
Trump may well have Republican control of both houses of the U.S. Congress, but many in his own party have made their distaste for him quite clear, and running a protectionist trade policy and an expansionary fiscal policy that leads to mounting deficits may prove very challenging.
Perhaps the main point is that Trump has to try and deliver at least part of what he promised. He has to try and shake up the Washington establishment, to attempt to make good on his appeal to voters as an outsider elected to clean up a dysfunctional system.
This will test his ability to compromise and to work with those he openly disparaged during the divisive election campaign.
Overall, the United States and the global economy are entering a period of uncertainty.
In uncertain markets, industrial commodities are unlikely to enjoy sustained rallies, rather they are more likely to mark time awaiting clear signals of where Trump wants to go, and how much opposition is standing in his path.