(Kitco News) – The newly-installed U.S. administration’s threats of import tariffs as high as 25% continues to roil commodities markets, and while many market participants are focused on potential shortages of physical gold and silver, that’s not where the real impact is likely to be felt, according to Bart Melek, global head of commodity strategy at TD Securities.
Melek was asked to comment on the prospect of Trump’s tariffs in a recent BNN interview, and he managed to remain measured and diplomatic in his responses while still conveying the magnitude of the possible impacts.
“It looks uncertain, I think that's probably the kindest and mildest thing I can say,” Melek said. “Recently, we had a so-called blowout in the EFP exchange for physical silver and gold markets, and that was all because markets were concerned about what the tariffs might be. At this point, we are not looking at global universal tariffs, though they may also be coming, as was said in the Oval Office the other day. Right now, the focus seems to be Canada and Mexico.”
“But it's not only the metals market,” he added. “It's also the energy market, which would be much more important to the broad economy than just the metals market itself.”
Asked about the impact on the U.S. supply chains from the tariffing of Canadian metals producers like Teck Resources, which sends significant amounts of copper and zinc south of the border, Melek said the U.S. administration could be creating an intractable problem for their own industry.
“We are a big exporter of zinc. That may very well be one of our largest sources of metal exports directly, and the U.S. certainly is a big customer of it,” he said. “What would it mean? Ultimately, there aren't that many substitutes. You could maybe get it from Chinese smelters instead… Ultimately, it means broadly higher prices domestically in the U.S., and some sort of market segmentation, a global price and a U.S. price.”
Melek said the energy sector is still more significant than the metals complex, with Canada a major supplier of oil to the United States, and many refineries in the northern part of the U.S. completely reliant on Canadian oil to supply local and regional demand.
“Ultimately, I don't think that Canadian oil can be easily substituted away, no matter what some politicians may claim south of the border,” he said. “The reality is the United States imports some 4.5 million barrels of crude [per day] from Canada. Most of it is heavy crude, which not only produces gasoline but produces heavier fuels, other byproducts that are necessary for industrial uses, transportation of industrial and commercial goods.”
“The reality is, even if you retooled those refineries, which would take a significant amount of capital, and would take a significant amount of time, America doesn't really have the heavy,” Melek continued. “It would have to bring it either from Venezuela, and Venezuelan industry is not exactly producing on all cylinders, or you would have to bring in the heavy from Saudi Arabia or somewhere else.”
“And that begs the question, why target Canada when you're going to have to replace it with foreign product from somewhere else? Sweet crude isn't enough for it, and there's a lot of logistics that would have to be re-shifted, so it's a long-term phenomenon that would have to occur,” he said. “In the short run, because demand for oil is so-called price-inelastic, the U.S. would probably eat most of the 25%, in essence, higher prices.”
Asked whether he thought Trump’s tariffs would ultimately be applied to Canadian oil exports, Melek demurred but said it would be counterproductive for the U.S. economy.
“I think it would be unwise to apply a tariff on imported crude in the United States, since the United States still consumes a lot more than it produces, though it produces a lot more than it has historically,” he said.
Melek was then asked about the impact of potential tariffs on lithium prices, with the industrial metal so essential for fueling the ongoing green energy transition.
“Ultimately, any time you increase the price of a good domestically, you will have less demand,” he replied. “Something like lithium is probably a lot more elastic than oil, we still have very few substitutes for energy coming from crude. Meanwhile, if you're using the lithium for something like an EV, I have other substitutes for it, I can have an ICE vehicle instead. So I think it wouldn't be accretive for prices, broadly.”
On the other hand, Malek believes the tariffs would have a very significant impact on precious metals prices, though not in the way many market experts have suggested, but more in terms of rising demand for the monetary metals to protect against skyrocketing inflation.
“If we do see these broad tariffs against commodities, against manufactured goods, ultimately I equate them to a negative supply shock,” he said. “In essence, aggregate prices take a lift almost immediately. Some get fully paid by the U.S. consumer, some of the incidences of these tariffs get passed on to producers, but overall, prices move higher.”
“Now, it depends... what is the Fed going to do?” Melek emphasized. “If the Federal Reserve accommodates the shock – in essence, it gets worried about the negative impact on employment, and let's say it lowers the rate a lot at a time when you have inflation from these tariffs – you could have a bit of an early 1980s, [late] 1970s phenomenon where you have a supply shock from tariffs and then you have monetary policy that accommodates it, and then you have an inflation problem, probably not only in the United States, but globally.”
Asked whether TD Securities sees the Trump tariffs as the largest threat facing the global commodities market in 2025, Melek said that may well be the case, but other massive threats were already there.
“We'll see what happens, [Trump] will apparently have consultation,” he said. “The other big one, of course, is the fairly weak performance of China, and that certainly was the big story right before tariffs and right before Mr. Trump won the election – which I think, for the most part, was unexpected.”
