Commodity companies are beginning to feel the impact of President Donald Trump’s trade policies, and their earnings report cards will signal how well they’ve been able to protect shareholder value.
Raw-material producers are coming off their worst week since February following the longest quarterly sell-off in commodities since 2015. Demand concerns mounted after the International Monetary Fund cut its global growth forecast, in part due to escalating trade tensions. Amid the tumult, energy markets have been a rare bright spot, with both oil and natural gas reaching multi-year highs in 2018.
Industrial-metal miners are bearing the brunt of Trump’s tariffs, with Alcoa Corp. forecast to post its weakest quarterly earnings since it split from its jet- and car-parts business in late 2016. In agriculture, producers still face low prices but a volatility pickup may help traders. While higher steel prices-- a consequence of metal levies-- boosted costs for some oil companies, these are no match for the strong tailwind from the rally in crude.
"There’s a dichotomy in performance between the metals and the energy side,” said Peter Sorrentino, the Dallas-based chief investment officer of Comerica Asset Management Group, which oversees $67 billion. “Industrial metals and even precious metals for the most part have been under pressure from a strong dollar, and most of the energy components have done better, from crude oil to even natural gas."
Metal Miners
The Bloomberg World Mining Index has tumbled 12 percent since the end of June as prices of many raw materials tumbled. Apart from the pain of lower cash flow, miners also faced higher cost that came with the surge in crude oil prices.
Signs of economic slowdown in China are raising demand concerns for the world’s largest consumer of metals, grains and energy. An index of new export orders that the Chinese government published earlier this month fell. A Bloomberg Economics gauge that aggregates the earliest-available indicators on business conditions and market sentiment signaled the nation’s growth decelerated in September, even before the latest round of tariffs took effect.
“Weaker commodity prices are expected to weigh on earnings,” RBC Capital Markets analysts including Stephen Walker said in a note last week. The analysts remain “cautious as China decelerates,” even as they acknowledged that a rebound in infrastructure spending could lift metal prices by mid-2019.
While Trump’s metal tariffs were intended to protect U.S. companies, Alcoa, the nation’s largest aluminum producer, also took a hit as the levies boosted costs of shipping raw material into the country from its smelters in Canada. The company may confirm analysts’ expectations of a rebound in earnings in the fourth quarter when it reports third-quarter financial results on Wednesday.
Agriculture