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The idea that the gentle flapping of a butterfly’s wings can cause chaos halfway around the world is well known. But commodities markets have been put to the test in recent weeks by what you might call the 800-pound gorilla effect: the idea that breast-beating in the White House can trigger unrest on the market. global metals, agriculture and energy markets.
President Donald Trump has imposed sanctions on Russia’s largest aluminum producer, Rusal, stepped up trade with China, and tweeted sarcasm against OPEC, the cartel of oil producers. Its actions have rocked the commodities markets at a time when futures speculation is near record highs in 2012, making markets even more volatile (see chart). Prices for aluminum, nickel and palladium soared and then fell. Soybean markets are threatened. Oil prices are at their highest levels for more than three years.
Physical trade has also been affected, with some shipments to Rusal of bauxite and alumina, aluminum raw materials suspended for fear of a violation of sanctions, and shipments of American sorghum to China diverted amid the ocean due to Chinese trade restrictions. The possibility of Mr. Trump imposing sanctions on oil shipped from Iran and Venezuela next month, squeezing global crude supply just at the start of the U.S. summer driving season, pushes oil prices further up . Geopolitics has often disrupted global commodity trade. But rarely has the US government been such a source of upheaval in so many markets.
Metals suffered most directly. From April 6, when the US Treasury banned Americans from dealing with Rusal and his boss, Oleg Deripaska, and threatened sanctions against non-citizens who traded with them, aluminum prices rose by more than 30% as buyers rushed for non-Russian metals. Then, on April 23, when the Treasury temporarily relaxed the sanctions proposed to spare the “hard workers” of Rusal and its subsidiaries, and said it could lift them on Rusal if Mr. Deripaska ceded control, they forfeited about half of those gains.
Nickel prices also climbed until April 19 amid expectations that the sanctions could extend to Norilsk Nickel, a Russian producer. JosÃ© Cogolludo, global head of raw materials at Citi, timidly notes that shortly before the sanctions rally, the bank told investors nickel prices would hit $ 16,000 per tonne by 2020. They hit 17. $ 000 in a few days, before falling again when the penalties were relaxed.
Cogolludo says metals hedging has reached unprecedented levels, with corporate clients seeking protection during price movements and speculators trying to hedge short positions. He adds that computer models, which represent most of the speculative activity in metals markets, respond quickly to market signals but are rarely good at deciphering geopolitical risk. This may have led to an overrun.
Agricultural commodities have suffered collateral damage from trade tensions between America and China. After the Trump administration imposed tariffs on steel and aluminum imports in March, China announced in mid-April a preliminary anti-dumping duty of 179% on imports of U.S. sorghum, a food house for animals. This brought to a halt US exports, which account for almost all of the sorghum entering China.
More importantly, China responded to a US proposal in April to impose tariffs of 25% on 1,300 products from China by threatening similar levies on 106 US imports, including soybeans and cotton. According to Stefan Vogel of Rabobank, 35% of China’s 97 million tonnes of soybean imports come from America, which is not easily replaceable. The market is therefore betting that China will not carry out its threats. But if traders get it wrong and a tariff war breaks out this summer, the disruption could be serious. He says soybean prices in America would fall. Soybean prices in South America, spared by Chinese tariffs, could soar.
Some say Mr. Trump shows a tendency to utter threats and then backtrack, which creates noise but causes little lasting damage. This view could be tested in the oil markets on May 12. The president threatened to reintroduce sanctions against Iran unless Britain, France and Germany agree to renegotiate the Iran nuclear deal by then.
Some oil bulls say Mr Trump’s appointment of Mike Pompeo as secretary of state and his appointment of John Bolton as national security adviser – both Iranian hawks – have made sanctions more likely. These could remove at least 500,000 barrels a day of Iranian oil from a market that already appears to be tight because OPEC and non-OPEC producers have limited production. Abhishek Deshpande, head of petroleum research at JP Morgan, says such sanctions could raise average annual oil prices by about $ 10 a barrel (Brent crude is trading at close to $ 75). Further measures threatened against Venezuela if the May 20 elections are not free and fair could compress the market even further.
But Bob McNally of Rapidan Energy Group, a consultancy firm, says the impact of rising oil prices on American drivers could persuade Mr. Trump to compromise on Iran and Venezuela. Nervousness with the approach of the midterm elections, he believes, explains the president’s first tweet aimed at OPEC. On April 20, Mr. Trump blamed the cartel for the “artificially very high” prices, although the high prices are also a boon to US shale producers.
OPEC ministers, disturbed by the tweet at a birthday party in Jeddah for the organization’s secretary general, Muhammad Barkindo, were not conciliatory. They have claimed, even implausibly, that they are not trying to rig oil prices. But they should be careful not to take Mr. Trump’s ability to play with the markets lightly. With bullish bets on oil prices near record highs, it wouldn’t take much to trigger a sharp reversal. Just ask the metal traders: the 800-pound gorilla can ruin prices and drive them up.
This article appeared in the Finance and Economics section of the print edition under the title “The 800-pound Gorilla Effect”