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April 17, 2025 | 14:22
Commodities: In the Line of Tariff Fire
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Commodities: In the Line of Tariff FireCarl Campus, Aaron Goertzen, CFA, Sarah Howcroft, CFA and Art Woo |
President Trump’s policies are taking a heavy toll on a number of commodities with gold being the notable exception. |
With the U.S. trade war with China now in full swing and a multitude of tariffs imposed or threatened against other countries and sectors, it appears that some commodities are likely to bear a relatively heavy burden. Levying duties on resource-based inputs (e.g., raw materials, intermediate goods) seems like an unusual way to encourage import substitution and thus boost domestic manufacturing. As of this week, we estimate that the array of executive orders since February has increased the average weighted U.S. tariff rate to around 25%. This marks a staggering increase from 2.4% in 2024 and has exceeded most forecasters’ worst-case scenarios. The net result is likely to be a slump in international trade and industrial growth over the remainder of 2025 (following an initial spurt of tariff front-running) and possibly into next year, depending on how long tariffs are in place. While the situation remains extremely fluid, in the following we highlight how the sharp rise in trade barriers is affecting key commodities. |
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Crude oil on the front burnerAs the world’s most intensely speculated commodity, it’s not too surprising that the price of crude oil has been hit hard. First, like most commodities, crude oil is vulnerable to a downturn in U.S./global growth, which would in turn hurt global oil demand. The IEA and U.S. EIA’s latest revisions have increases of 730 kb/d and 900 kb/d respectively this year, which still seem very high (vs. +830 kb/d in 2024). We think an increase of around 500 kb/d is more realistic, and that is still subject to downside risks given all the tariff uncertainty. The second, and arguably more challenging, factor to assess is OPEC+’s production curtailment strategy and its impact on global oil supply. Note that the cartel is currently holding back 5.6 mb/d in supply, equivalent to just over 5% of global oil production capacity. Otherwise, the oil market remains stunned by the cartel’s decision to accelerate the unwinding of 2.2 mb/d in voluntary cuts to 411 kb/d in May (vs. prior plan of 135 kb/d). We think President Trump’s stated desire for lower crude oil prices is factoring heavily into OPEC+’s decision-making process these days. Thus, we continue to highlight that the balance of risks to our forecasts for West Texas Intermediate crude of US$65/bbl and $70 in 2025 and 2026, respectively, are skewed to the downside. Canadian lumber long in Trump’s crosshairsTrump’s first term began just as the one-year grace period ended for the expired 2006 Canada-U.S. Softwood Lumber Agreement. This ushered in another era of punitive anti-dumping and countervailing duties (AD/CV) imposed on U.S. imports of Canadian lumber, extending a decades-long battle over the commodity. The latest AD/CV levies, which are adjusted annually, were increased to 34.5% from 14.4% (combined average) and will come into effect in late summer/early fall, further chopping at the competitiveness of Canadian lumber exports. Meantime, the Trump Administration is also readying an array of policies aimed at increasing U.S. lumber/timber production and reducing their reliance on foreign (i.e., Canadian) products. The Section 232 national security investigations take a similar aim at reliance on imports of foreign lumber/timber and could result in additional tariffs of up to 25%, which would be stacked on top of the AD/CV duties. |
A potential combined levy of roughly 60% would be devastating for Canadian lumber producers, which are heavily dependent on exports to the U.S. (Chart 1). Of the roughly 20 billion board feet (bbf) of Canadian lumber produced in 2024, around 60% was shipped south of the border. Looking at it another way, the U.S. imports about 30% of its lumber needs each year and Canada provided nearly three-quarters of that share in 2024. Those are big shoes to fill, especially in the near term, and as such will likely lead to a period of volatile price swings and a highly uncertain backdrop for Canadian lumber producers. Crops uniquely vulnerable in trade warThe U.S. runs a large trade surplus in farm products, with exports accounting for 30% of U.S. crop sales and shipments to China alone accounting for 8%. Farmers have also become political targets, with scorned U.S. trading partners threatening to focus retaliatory measures on the President’s rural constituents. Given these sensitivities, benchmark prices in Chicago have experienced bouts of heavy pressure punctuated by periodic relief rallies over the past few months. Trade barriers risk exacerbating existing oversupply in North America, and supportive growing conditions suggest another large harvest this year. As a result, the outlook for benchmark U.S. crop prices has been revised progressively lower, with wheat (expected to average US$5.80/bushel this year) and soybeans (US$10.60/bushel) most affected. Better trade relations and average crop yields would help prices begin to recover in 2026, but neither is guaranteed. |
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Tariffs a double-edged sword for industrial metalsThe major base metals were all whipsawed by tariff-driven market swings in recent weeks. While most LME benchmarks have clawed back a portion of their “Liberation Day” losses, only copper is (nearly) back in line with 2024 levels, up 4.5% year-to-date. Meanwhile, the COMEX futures premium over the LME remains wide (Chart 2), meaning U.S.-based copper buyers continue to face higher prices. This is because copper is currently subject to a Section 232 probe and the administration has suggested a levy of up to 25% may be applied. The Commerce report is due by late November, but an announcement could come earlier. Note that while the U.S. is among the top 5 copper producers (and contains roughly 5% of the world’s reserves), it relies on imports for roughly half of its annual copper needs, almost exclusively from Chile, Canada and Peru. Despite the dampening effect of the trade war on global manufacturing, we could see some upside for the red metal given supply tightness, which could be exacerbated by tariffs. Treatment charges (charged by smelters to miners) have slipped further into negative territory in China and exchange inventories (outside the U.S.) are falling. Still, our forecast of US$4.20/lb for benchmark LME copper this year remains subject to greater downside than upside risks. A shiny beacon amidst the chaos |
Perhaps more than any other asset, gold stands out as a clear winner in the current environment. With tariff confusion weighing on U.S. Treasuries and the dollar, precious metals have emerged as the preferred safe haven against market volatility and higher inflation. Gold has catapulted 24% year-to-date, notching new record highs above US$3,300/oz, equivalent to roughly |
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For more detailed insights, please see the April 2025 edition of The Goods. |