Forecasting the year-ahead outlook for commodities, while popular among analysts, is a bit of a mug's game at the best of times, but the view for 2019 is made even more complicated by one volatile factor: Donald Trump. While there are other drivers of commodity prices next year, the mercurial US president looms large over the sector, and the actions of his administration will either amplify or partially nullify the established trends.
Before trying to decipher Trump's likely actions it's worth looking at the trends likely to move commodity markets in 2019. Chief among these is increasing concern about slower global economic growth, with particular worries over China, the world's second-largest economy and the biggest importer of commodities.
There are roughly two schools of thought on China, the first being that the country will have to endure lower growth and tighter credit conditions as it struggles to overcome US tariffs on its exports and slower growth in other trading partners. The second is that once again Beijing will successfully manage to open the spending taps and the subsequent raft of infrastructure and construction projects will keep commodity demand healthy and economic growth above the 6 percent level.
The second scenario would be supportive for imports, and prices, for bulk commodities such as iron ore and coal, and for industrial metals, most notably copper. However, it's also worth noting that much of what Beijing is likely to do is dependent on how its trade dispute with the United States unfolds.
Trump and his Chinese counterpart Xi Jinping appeared to reach some sort of detente at the recent G20 meeting in Argentina, but it's still an open question as to whether this can morph into an agreement acceptable to both sides. The pattern of the dispute so far has been dictated by Trump, who has alternated between ramping up rhetoric and calming it down, which does little more than create opportunities for volatility traders.
The real question to be answered is whether both China and the United States are prepared to weather the pain of an extended trade dispute. It's likely to be the case that the country upon which the most tariffs are imposed, in this case China, will feel the economic cost first.
But the United States will also eventually feel the fallout through higher costs of goods, rising inflation, lower consumer spending and a loss of competitiveness in industries no longer exposed to international rivals. How these dynamics play out largely depend on Trump's actions.
The US leader may come under increasing pressure from within his Republican Party to reach an accommodation with China if the economy starts to slow and the equity markets continue their recent downward trend. Trump has staked much of his presidency's success on delivering a strong economy with high returns for investors, and if this is challenged it may force him to seek ways to maintain economic momentum.
However, Trump is also likely to be distracted by his mounting legal difficulties and by the takeover of the House of Representatives by the Democratic Party. The threat of legal action and further investigations into his affairs, as well as his friendliness toward Saudi Arabia and Russia, also are a major factor likely to influence crude oil.
The Trump administration effectively kicked the can on its re-imposition of sanctions against Iran over its nuclear programme down the road until April, when the import waivers granted to Tehran's biggest customers are set to expire. This is likely to ignite debate over whether the crude oil market will tighten if Trump does end the waivers allowing Iran to export, or whether US shale output will be enough to keep the market in surplus.
The interplay between Trump, embattled Saudi Crown Prince Mohammed bin Salman and Russian strong man Vladimir Putin will also be key for the actions taken by the world's three largest oil producers. The trouble for analysts is that there is no way to be certain how all the factors around Trump will develop.
His legal woes may amount to little, or they may lead to his impeachment and removal from office. Trump may reach a deal with China that ends the tariff war, or he may not and it could escalate. He may really crack down on Iran's oil exports, or he may not. In some ways, commodity markets have become unwitting hostages to the man likely to be regarded as the most controversial political leader of his time.
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