Commodities are caught in a global trade war: How bad could it get?

Investing.com -- Commodities markets are now at the heart of an intensifying global trade war, with the latest escalation largely driven by the re-election of Donald Trump and renewed U.S.-China tariff tensions. 

RBC Capital Markets assessed the scope of potential fallout across global commodities and mining equities.

The findings paint a cautious but data-grounded picture of sectoral vulnerability if the trade war deepens.

According to RBC, even if tariffs were to be rolled back in full, a scenario deemed highly unlikely, the damage from broken trade relationships and heightened uncertainty would linger. The current reality, however, suggests ongoing escalation. 

The global commodity complex is already reacting, with many prices retreating from recent highs and pressure building across cost structures.

The brokerage uses the industry cost curve as a benchmark to measure potential downside, with historical data indicating that commodities tend to hover around the 90th percentile of the cost curve. 

Any movement below that typically prompts production cuts. At current spot levels, iron ore would have to fall another 18% to hit its cost support ($80/t), copper could decline 24% ($3.15/lb), and aluminium is about 12% above support at $1/lb.

RBC warns that if the market reaches the more severe 75th percentile level, seen only 11% of the time historically, commodity prices could fall sharply: copper by 41% to $2.50/lb, iron ore by 34% to $64/t, and aluminium by 17% to around $0.90/lb.

Such declines would directly impact miners’ earnings. RBC’s scenario analysis suggests a 13% drop in sector-wide earnings at the 90th percentile, and a 37% collapse if prices hit the 75th. 

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Base metals producers such as Anglo American (JO:AGLJ), Antofagasta (LON:ANTO), and Norsk Hydro (OTC:NHYDY) appear most exposed due to their position higher up the cost curve. 

Anglo American and Antofagasta, in particular, face steep downside risks with copper priced at $4.63/lb, well above support levels. 

In contrast, Norsk Hydro is already pricing in aluminium at $0.90/lb, suggesting limited further downside.

More insulated are coal and platinum group metal producers like Glencore (OTC:GLNCY), Anglo American Platinum, and Ecora Resources. 

Their products are already priced within the cost structure, and earnings would be more resilient unless there is a deep economic shock.

The broader market has responded quickly. Since the recent trade announcements, the SXPP index has fallen by 20%, with names like Norsk Hydro, Glencore, and Antofagasta taking the hardest hits. 

For context, past crises such as the GFC and COVID-19 saw declines of 60-75%, suggesting this may only be the beginning.

Valuations reflect the pressure. RBC notes the sector’s price-to-NAV and EV/EBITDA multiples have dropped to 0.72x and 4.6x, below long-term averages but still above crisis troughs, leaving room for more downside.

Free cash flow and balance sheet resilience vary widely across the sector. Ecora Resources and Norsk Hydro are seen as most defensively positioned due to limited capex and stable revenues, while Vale S.A. and Antofagasta face more stress if conditions worsen.

The risk of breaching 3x net debt to EBITDA is real under RBC’s worst-case scenario.

Dividend payments are also at risk. Under a severe scenario, Antofagasta’s payouts would vanish completely, while Central Asia Metals and Vale S.A. would see reductions. 

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In contrast, Norsk Hydro, Ecora Resources, and Anglo American Platinum appear most resilient in maintaining their distributions.

In terms of implications, stronger players may use the downturn to consolidate.

Rio Tinto (NYSE:RIO) has already begun pivoting toward lithium and could continue acquisitions if valuations remain attractive.

BHP Group (NYSE:BHP) might be more constrained despite speculation around further M&A. 

Glencore remains unknown, management has signaled interest in transformational deals, but volatility has already stalled attempts to offload certain assets.

RBC anticipates continued modest U.S. GDP growth (1% in 2025/26), but warns that escalating trade tensions present significant downside risks for commodity prices and mining companies. 

They believe current market valuations haven’t fully accounted for potential worst-case scenarios, with the cost curve remaining a critical benchmark.

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