Deciding factor: A line handler helps dock the oil tanker, Texas Voyager, at Port Everglades in Fort Lauderdale, Florida. The remarkable cohesion of Opec has been a defining feature of crude oil markets in recent years. — AFP
IT may pay to be a contrarian in 2025, as the upcoming year has the potential to be one of the most volatile in recent memory, particularly in commodities.
There is the return of US President-elect Donald Trump, who is threatening to disrupt global trade flows with a wall of tariffs on imports into the United States.
With an incoming Republican-led Congress, he will have little to restrain him this time around.
There is also still considerable uncertainty over the economic trajectory of China, the world’s second-biggest economy and largest buyer of commodities.
And the future of the global energy transition has become much hazier because of Trump’s climate change scepticism, the increasing influence of right-wing political parties in Europe, and increasing public wariness of the costs they may be forced to shoulder as the world shifts away from carbon-based energy.
All of the above could create an environment in which contrarian ideas turn into realities. Below I outline five such scenarios. To be clear, these are not my base case expectations for 2025. Rather they are possibilities worth keeping an eye on.
> Trump is way better than expected
In this scenario, virtually everything goes right for the incoming Trump administration. The threat of tariffs is enough to force concessions from major trading partners, resulting in the implementation of only a few small trade barriers.
The United States remains the global economic standout, and the rest of the world essentially rides on its coattails.
Inflation eases, monetary policy is relaxed, and China leads an Asian economic recovery as Beijing’s stimulus efforts finally bear fruit.
In turn, commodity prices are pushed upward, apart from crude oil, which would probably struggle from too much supply, especially if US producers increase output significantly as Trump is demanding.
> Trump is way worse than feared
The new Trump administration follows through on his most extreme threats, erecting massive trade barriers and withdrawing from, or undermining, international pacts and treaties, including the Paris climate deal and the North Atlantic Treaty Organisation.
If this happens, expect the global economy to suffer as countries battle to re-order trade flows and supply chains. Inflation would probably rise globally, and monetary policy may be tightened in many major economies as a result.
Commodities exposed to global growth, such as copper and iron ore, would weaken, as would crude oil and liquefied natural gas as demand softens.
A preview of this is copper’s reaction to Trump’s election victory, with London contracts dropping 7.7% in the following week.
It is also likely that bond vigilantes would punish Treasuries in response to Trump’s policies, especially if he combines huge tariffs with deficit-boosting tax cuts.
And US equities may ultimately turn bearish if Wall Street realises that the sugar high from tax cuts will not outweigh the economic damage from tariffs.
> China comes roaring back
Many Western analysts now hold the view that China is the sick man of Asia, meaning a rebound in its economy would come as a big surprise.
But it is possible that 2024 will be remembered not as a moment of decline but as the year Beijing cleaned up the troubled parts of its economy, such as the poor financial state of housing developers and local governments. These efforts could start to bear fruit in 2025, allowing Beijing to focus more on boosting consumer sentiment and spending.
If China is also able to successfully navigate the new Trump administration’s policies, it could change tack to engage more constructively with Europe and build better partnerships with the global south, finding new markets to exploit its leadership in energy transition technologies and products.
A revitalised China would be a boon for commodities such as copper, iron ore, liquefied natural gas and coal, but perhaps not as much for crude oil, given its ongoing and rapid switch to electric vehicles.
> Opec+ starts to fracture
The remarkable cohesion of the Organization of the Petroleum Exporting Countries and its allies (Opec+) has been a defining feature of crude oil markets in recent years.
This collective export body has used output cuts to anchor crude prices in a range around US$75 a barrel for the past two years. That may not be as strong as some members would like, but is still considerably higher than would likely have been the case without the production discipline.
However, the ongoing demand softness and the new Trump administration’s aims to further boost US output may place more pressure on the bloc’s unity.
> The energy transition accelerates, but the United States is left behind
One way China can counteract any US trade barriers is to boost its engagement with the rest of the world, and one of the best ways of doing this is by expanding trade in manufactured goods such as EVs, solar panels, batteries and wind turbines.
The energy transition could accelerate on the back of cost-competitive Chinese goods, coupled with a willingness among buyers outside the United States to move away from expensive fossil fuels.
In this scenario, the United States gets further left behind as Trump’s “America First” policy effectively becomes America alone.
If the energy transition does accelerate, it will be positive for copper, lithium and a host of minor metals. — Reuters
Clyde Russell writes for Reuters. The views expressed here are the writer’s own.
By CLYDE RUSSELL
