Is a Trade War with China a Serious Risk for Freeport Investors?



Trade war

During his Presidential election campaign, Donald Trump vowed to impose a 45% tax on imports from China. However, Trump’s acceptance speech after winning the election had a tone of reconciliation, as compared to his previous aggressive election rhetoric.

Trump’s decision to speak with the Taiwanese president hasn’t gone over too well with China, however, suggesting that Trump could be a wild card as far as trade and foreign policies are concerned.

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China is a key driver

Bloomberg has quoted Freeport-McMoRan (FCX) CEO (chief executive officer) Richard Adkerson as saying that “it will take more than Donald Trump to keep copper rallying.” Adkerson also stated: “In terms of being a long-term driver of copper prices, it will have an impact but not a huge impact…For copper demand to be robust requires a positive economic situation in…the world’s global economy.

We should remember that China is the world’s largest copper consumer. The country is the largest market for miners like Rio Tinto (RIO) (TRQ) and BHP Billiton (BHP).

Wild card

We still don’t know much about how Trump’s trade and foreign policy would impact the global economy. If Trump can walk the thin line between boosting US growth and not hurting global trade and economic activity, copper prices should get support. However, if we see trade wars, global economic activity could be jeopardized, and copper prices could come under pressure.

Time to call a bottom?

Some miners seem to have called a bottom in commodity markets with Glencore (GLNCY) reinstating its dividend program. However, we should remember that miners have not been quite accurate in forecasting economic cycles. Notably, Glencore announced a share buyback program in 2014, just before commodity prices started to fall. As commodity prices fell, the company had to issue new shares at a much lower valuation next year.

For now, though, copper seems to have settled at higher price levels on the projected supply shortfall. However, it will be crucial to watch Trump’s policies once he takes office.

In the meantime, keep visiting Market Realist’s Copper page for ongoing updates on the industry.


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