Trump election: Base metals surge due to infrastructure plan

Trump election: Base metals surge due to infrastructure plan

On 4 July 1837, Ralph Waldo Emerson’s poem Concord Hymn was read at the unveiling of the Concord Monument in Massachusetts to commemorate the Battle of Concord of the American Revolutionary War. The name of the poem may not ring any bells to you, but one phrase in particular from the poem probably will, the shot heard ‘round the world.

The phrase has been used to describe many a historical event. It was famously used to describe the assassination of Archduke Franz Ferdinand of Austria, which kicked off the First World War. For any baseball fans out there, Bobby Thomson’s walk-off home run to win the 1951 National League pennant tie-breaker was also famously referred to as the shot heard ‘round the world.

The largely unexpected event that took place on 8 November in the United States of America is also probably worthy of the phrase.

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Much of the world looked on as, to the astonishment of many, Donald Trump was elected President of the United States of America on 8 November. Although the utterance of “Donald Trump, President of the United States of America” may not illicit the same reaction as “the Giants win the pennant! The Giants win the pennant!” it certainly was a shot heard around the world.

So what now? Well, among the many things that Donald Trump promised during his campaign, was that he was going to improve the economy and despite the prevailing wisdom by much of the mainstream media, markets actually reacted favorably in the immediate aftermath of Trump’s election.

“The Dow Jones industrial average reached a record high on Wednesday amid growing hopes that President-elect Donald Trump would deliver major stimulus to the economy,” according to an article in the Washington Post.

There were many promises made during Trump's presidential campaign, however most of those promises were fairly vague, which had many asking what exactly improving the economy would entail. 

Finally, a few days before the election, Trump and his advisers came out with a proposal for an economic plan. The plan called for massive infrastructure projects worth 1 USD trillion. 

Jeff Spross of The Week laid out the plan pretty succinctly by stating, “Trump would provide 137 USD billion in tax credits to private construction companies willing to take on infrastructure projects. The authors [of the plan] calculate that this money would incentivize those companies to drop 167 USD billion in initial equity, and then use that cushion to borrow far more on the private financial markets. The end result would be 1 USD trillion in spending on new infrastructure projects [...] The federal government would only be out 137 USD billion. And even that spending would be offset by increased tax revenue from the new jobs and corporate profits the projects would generate, Team Trump argues.”

So, come 9 November, the day after the election, Trump is named U.S. President-elect. And, again, to the suprise of many, financial markets reacted favorably, especially industrial metals commodities.

According to Jefferies Group LLC, Trump’s aggressive infrastructure plan should increase demand for copper as well as other mined commodities.

Trump’s infrastructure plan released days before Election Day was the reason copper prices rose to a 15-month high on 9 November according to a report by Bloomberg. The report also stated that, “metal producers such as Freeport-McMoRan Inc. and U.S. Steel Corp. soared while construction and mining equipment maker Caterpillar Inc. climbed as much as 10 percent, the steepest intraday gain in seven years.”

Seth Rosenfeld, an analyst at Jefferies commented in an interview recently that the U.S. steel sector would emerge as a “unique beneficiary” of a Trump presidency. As it happened there was a surge in steel prices after the election. Steelmakers themselves also did well, with the aforementioned U.S. Steel Corp. jumping as much as 20 percent. 

Iron ore prices shot up about 5% on 9 November trading at USD 74 per metric ton. On Monday 14 November the price was still going up with Iron ore trading at USD 80 per metric ton. To put this number into perspective, 11 months ago, Iron Ore was trading at an all-time low of 36 USD per metric ton.

The question now is, can this surge in commodities prices be sustainable? Goldman Sachs doesn’t seem to think so.

"We believe that the initial reaction in iron ore and copper prices has been excessive and reiterate our view for sequentially lower prices," wrote Goldman Sachs in a report released on Friday 11 November.

However, it has to be said, with the Republicans not only having a majority in Congress but also in the Senate, one would be inclined to think that Trump wouldn’t have too much trouble getting his infrastructure plan passed through both houses, which may see prices for base metals higher for some time.

“Infrastructure spending appears to be a top priority, and that was something consistent through the entire election process […] with significant infrastructure spending in the U.S. and a Republican controlled Congress to work with, it definitely makes sense industrial metals and materials would be bullish,” said Jason Bloom, director of commodities and alternative products strategy at PowerShares.

It's only been a week since Trump was elected, so perhaps it is better to proceed with caution. Our own Consensus Forecast for Commodities price forecasts post-Trump election will be available in the first week of December once the analysts that participate in our Consensus Forecast have had time to evaluate the situation.

Keep a look out for our next FocusEconomics Consensus Forecast Commodities report, as there will be plenty of coverage besides metals prices in the wake of the Trump election. The highly anticipated OPEC meeting will take place on 30 November in Austria, which will likely have an effect on our energy price forecasts as well.

In the meantime, you’ll just have to wait and see how things unfold in the coming weeks as the dust settles a bit. In any case, you can download a free sample of our FocusEconomics Consensus Forecast report by clicking on the button below. 

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5-year price forecasts for 33 commodities. Energy, metals & agricultural commodities.

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Date: November 15, 2016


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