Trade War: Can Commodities Break Free?

Trade war

Trade war fears have taken a toll on industrial metals in 2018. Gold (GLD), which should have shined under these circumstances, is also reeling under the impact of rising interest rates and the stronger US dollar (UUP). In this part, we’ll discuss the outlook for commodities amid the trade war scare.

Trade War: Can Commodities Break Free?

Copper

Copper is more prone to geopolitical developments compared to some of the other commodities. Recently, copper prices fell below $6,000 per metric ton. Copper prices topped $7,000 per metric ton in June. In copper’s case, the expected demand slowdown in China and resilient supply led to a demand-supply picture that’s bearish compared to what markets priced in late 2017. Copper miners including Freeport-McMoRan (FCX) have been subdued in 2018 amid falling copper prices. Copper’s near-term outlook looks somewhat bearish. China and the US appear to be in the trade war for the long haul.

Aluminum

Aluminum’s demand-supply dynamics are more or less unchanged compared to what the markets envisioned at the beginning of the year. Higher input costs, especially alumina prices, also support aluminum. However, trade war fears have led to a sell-off in base metals. Aluminum has also tracked other base metals lower. Alcoa (AA), the leading US-based aluminum producer, is trading with a year-to-date loss of 17.0% based on the closing prices on August 31. The SPDR S&P 500 ETF (SPY) has risen 9.7% during this period.

Sanctions on RUSAL, the leading Russian aluminum producer, could be another wildcard for aluminum markets. In April, the sanctions catapulted aluminum prices to multiyear highs. Read Can Alcoa Recover from Its Recent Slump? for Alcoa’s bearish and bullish drivers.