The Art of Winning in the Midst of Trade Wars
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win…” — Tweet from U.S. President Donald Trump
We’ll leave it to the economic and political pundits to debate the merits of trade wars. In the meantime, we’ll talk about how they can affect your business.
Nothing unnerves businesses more than uncertainty. Recent geopolitical events — some of which are driven by U.S. tariffs on global exporters in an effort to get better trade terms out of countries such as China and the U.K. and bolster the American oil, steel, and aluminum industries — are fueling much of this uncertainty. As the U.S. continues to renegotiate trade deals, the world teeters on the verge of a full-scale trade war much like the one prompted by the American Smoot-Hawley tariff in the 1930s.
The Global Outlook for Crude Oil
For the time being, a dramatic upswing in U.S. exports to 3m bbl/day, increases in Russian and Saudi Arabian production, and a recovery in Libya have led to prices falling for Brent crude from around $79/bbl at the end of June to around $72/bbl. While U.S. crude settled at a seven-week low last Thursday, industry experts are still pointing out the country’s global economic growth is tracking around 4.3 percent, and could go higher.
“When we look at the fundamental picture, it really hasn’t changed,” Jeff Currie, Goldman Sachs’ global head of commodities research told CNBC’s “Closing Bell” on Thursday. “You’ve seen substantial liquidation, really off of the headline risk around tariffs, but the underlying fundamental story and the case for owning commodities, as well as oil, really remains intact.”
However, fears of global supply shortages are growing stronger. From high demand and low supply in OPEC to the upcoming deadline for U.S. sanctions on Iranian oil and gas exports that will come into play in November, global supply stability and reserves could take a hard hit — especially with the possibility of unexpected outages.
The Global Outlook for Steel and Aluminum
Overall uncertainty over tariffs is likely to feed further volatility for the metals markets. Steel prices have risen sharply since Spring, when the Trump administration signaled its plan to put a 25 percent tariff on steel and a 10 percent tariff on aluminum. Just a few days ago, the U.S. president announced he may double the tariffs on steel and aluminum from Turkey.
The administration’s goals for imposing new tariffs on steel and aluminum included reducing trade barriers, lowering the U.S. deficits in merchandise trade, and bringing American furnaces and smelters roaring back to life. However, these new sanctions have not only increased the likelihood of retaliation from exporters to the U.S., but have also divided steel and aluminum companies and their workers into two camps: Those who make the metals and gain tariff protection, and those who buy the metals and must pay higher prices.
Higher steel and aluminum prices could also affect the entire U.S. economy with higher costs for commercial construction, the building of roads and bridges, and the building of pipelines to transport the oil and gas that is increasing in demand. Add to those factors the estimated impact of retaliation from U.S. trading partners and the overall cost to the country’s economy, and the steel and aluminum tariffs are projected to total $37 billion, according to the Trade Partnership.
The Keys to Successfully Navigating Trade Wars
With all the volatility geopolitics and trade wars bring, the only thing that is certain is uncertainty. Trade wars will drive a significant amount of trading and hedging associated with securing supplies and selling products for the impacted companies, which means finding the optimal workaround can have a significant impact upon profitability.
Transacting in today’s commodity markets requires real-time trading solutions that enable market participants to quickly react to market opportunities without exposing their organizations to undue legal or financial risk. This can be a tall order without an integrated commodity trading and risk management system, like Allegro Horizon, that enables real-time measuring and reporting of all commodity and derivative activities from the point of production to the point of consumption. Allegro’s solutions provide transparency in daily operations, helping customers understand the demand they’re going to meet and how to do so while ensuring a proper ratio of generation association with it.
Do you feel like your business is prepared for unexpected disruptions? Do you want to be profitable and pick up market share from your competitors that are unable to cope with the disruption? Let’s talk. Contact us today.