Moneycontrol Pro Panorama | Trump throws a curveball at metal markets

The big question is what happens when Trump lobs some curve balls that could disrupt the calculations behind these measures.

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The uncertainty for the metals industry could get a lot worse before it gets better. The next US President Donald Trump has fired a salvo, in typical style, from his social media account that he will levy an additional 10 percent import duty on imports from China and a 25 percent duty on goods coming in from Canada and Mexico. The stated provocation for these duties was that these countries were not doing enough to curb the imports of illegal drugs or substances that could be used to make drugs — mainly fentanyl — and illegal immigration into the US.

This comes at a time when the metals industry is already under pressure due to China’s economy slowing down and the absence of a ‘bazooka’ stimulus to kick start growth. In this case, however, blame the market for expecting too much, argues this FT opinion article ‘Five things the market got wrong about China’s stimulus package’. The author says that the widespread scepticism is due to misconceptions about what the country is trying to achieve. In short, the argument is that this is a long-term restructuring that is planned with lasting benefits and also has firepower to achieve near-term goals if required. “While western stimulus packages often prioritise immediate boosts, China’s approach is more like a marathon than a sprint,” he writes. The big question, of course, is what happens when Trump lobs some curve balls that could disrupt the calculations behind these measures.

Markets already had some premonition of the troubles heading the metals industry’s way after the US election results. Copper prices slipped post-elections as worries grew that tariff measures could hurt China’s economic growth and in turn lead to lower copper demand. This November 11 article on mining.com quotes a Macquarie trading desk note that says a 60 percent tariff on all imports from China could ultimately lead to its GDP reducing by 2 percent in 2025.

Of course, Trump will officially take charge in January and it remains to be seen if he will follow up with the promised tariff measures. But history has shown that he is capable of taking harsh measures even when global leaders have implored him not to do so.

A recent S&P Global note sheds light on the impact of these proposed new measures by Trump. The three countries account for 41 percent of the value of US imports of metals and minerals in 2023, with key imports among metals including gold, silver, steel, aluminium and base metals. The hike in tariffs will mean that domestic producers of metals will gain an upper hand on the pricing front, as they can hike prices to the extent of the cover provided by the higher duty. But that will impose a higher cost on the buyers of these metals in the US and they, in turn, will be faced with a choice of absorbing it or passing it to consumers. One will hurt margins and the other could lead to higher inflation and lower demand. Therefore, one expectation is that the user industries will lobby the US government to carve out exceptions and the like, so that the net impact may not be much on the industry. Whether the tariffs will have more bark than bite is one aspect to observe.

What does all of this mean for Indian metal producers? If US’ actions lead to a crimping of Chinese exports to the country, the surplus metal will find its way to other nations, India being one. Therefore, higher competition from imports is one risk. The bigger risk is that a global surplus in these metals, because the US is ramping up its domestic output, could see global commodity prices slip. That’s what the financial markets are anticipating, leading them to turn a bit bearish on commodities.

There is a silver lining to this cloud, however. It is that after Canada, Mexico and China, India is the fourth-largest source of imports to the US of metals and minerals. Therefore, if Indian companies can ramp up their output to supply the US market, then it could lead to higher revenue and compensate for the slippage in prices. My colleague Ishan Gera had looked at the data on India’s exports to the US of all commodities and the opportunity, going forward.

But the risks of the disruption to global trade by Trump’s actions are more uncertain and could be bigger than the potential benefits. Such measures invite counter-measures that then lead to a ripple effect across borders. And a disruption in trade also affects allied industries such as shipping.

What about stock markets? What companies desire most is certainty which then allows them to plan their strategy in terms of markets, output and investments in capital and labour. And investors desire a certain predictability in the earnings outlook. Both will be thrown out of the window if the worst comes true.

For Indian companies, the chief risk is if commodity prices slip sharply, then metal companies will find that despite being in a country where consumption growth in metals is very healthy, their performance will be nothing to write home about.

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Ravi Ananthanarayanan
Moneycontrol Pro