President Donald Trump has officially set out his plan to impose tariffs on steel and aluminum imports with China. Tariffs of 25% on steel imports and 10% on aluminum imports will result in a price increase for multiple consumers and slow down growth for many businesses globally. The rising tensions between China and the U.S. might seem like a time to move away from most growth-sensitive asset classes, but investors could be wrong.
The announcement resulted in a decline in the stock market as oil and metals started taking a big hit, but could this be a great opportunity to buy industrial metals? Copper has already fallen sharply by 4% in one month, while other oil and metal commodities follow the decline. Investors shouldn’t be too pessimistic and consider the chance of current tensions not escalating into a full-blown trade war.
This is thanks to China’s massive stimulus during the financial crisis which is set to offer another boost to global metals prices. Commodity analysts predict, “The resulting acceleration in metals demand is expected to push the copper market, as well as other base metal markets such as nickel and zinc, into deficit, leading to inventory draws, a tightening of the future curve spreads, and higher prices.”
We need to further investigate the backdrop to understand why a trade war might positively impact industrial metals. Looking back into December 2017, we have seen prices of aluminum and copper trend upwards even before rumors of a trade war started. Even though global trade remains strong, Chinese credit growth, a leading commodities indicator showed staggering trends in 2017. This means China’s President Xi Jinping will start another round of debt-fueled stimulus to repair the debt problem. Simply put, as long as China is tapering credit growth, the small increase in global trade won’t be an “unalloyed” positive for commodities. Alternatively, a high intensity trade war could initially hurt commodity prices but raise the probability of another round of stimulus in China in the next few years. Being wary of this stimulus will give investors an opportunity to buy during the dip and see industrial metal prices trend upwards.