LONDON: Doctor Copper has been trying to price in the potential for US import tariffs since late January, when President Donald Trump first included the metal on his tariff wish list along with steel and aluminium.
The threat looks set to become reality after the launch of a so-called Section 232 investigation, the same national security instrument that paved the way for steel and aluminium tariffs in Trump’s first term and their extension in his current term.
The tariff trade has so far played out in the arbitrage between the US copper price on the CME and the international price traded on the London Metal Exchange (LME).
But that may change as financial arbitrage generates a realignment of flows in the physical market.
Indeed, a raid on LME inventory suggests it is already happening.
MIND THE WIDENING GAP
While the LME copper contract is an international product with delivery locations across all three continents, the CME product is a US customs-cleared contract with only domestic physical delivery points.
This makes the arbitrage between the two contracts the perfect forum for trading the potential for U.S. import tariffs.
The CME premium over London jumped to more than $1,000 per metric ton when Trump first mentioned copper in the same breath as aluminium and steel as targets for tariffs.
With LME copper trading just north of $9,000 per ton, the CME premium implied the market was pricing in a 10 per cent tariff on imports.
The transatlantic gap had been steadily narrowing in the absence of any further comments from the Trump administration before Tuesday’s bombshell announcement that US import dependency would be the subject of a national security investigation.
Unsurprisingly, the US premium has flared wider again in the last 24 hours from around $500 to over $800 per ton for the CME May contract.
There is clearly room for a much higher US premium were copper to be subject to the same 25 per cent tariff rate covering both steel and aluminium from next month.
LME STOCKS RAID
While the CME copper price has shot higher, the LME price is little changed, with three-month metal continuing to track sideways around the $9,500 per ton level.
The early-year rally has stalled due to concerns about how Trump’s broader tariff policy will impact global trade and growth, particularly in China, the world’s largest copper buyer.
But there’s plenty of turmoil beneath the tranquil surface in the form of time-spread volatility.
The benchmark cash-to-three-months spread flipped from a comfortable contango of over $100 per ton to a backwardation of $250 per ton on February 14 and is currently trading close to zero.
The Valentine’s Day massacre of short position-holders was a one-off liquidity clear-out but the subsequent tighter tone is down to a clear-out of physical stocks held in LME warehouses.
Almost 100,000 tons of LME-stored copper have been cancelled over the last four days in preparation for physical load-out.
Total on-warrant copper stocks have slumped from over 258,000 tons a week ago to just 161,225 tons.
COMPLEX ARBITRAGE
It obviously makes a lot of sense to ship as much copper as possible to the United States to reap the rewards of having metal in place before the imposition of tariffs.
However, the physical arbitrage is a more complex trade than the financial arbitrage, as the market learned when the CME was squeezed last May.
The CME’s list of deliverable brands is mostly restricted to domestic, Canadian and South American producers, mirroring the country’s refined copper import mix.
LME stocks, by contrast, largely comprise either Chinese or Russian brands, which together accounted for 74 per cent of total on-warrant stocks at the end of January.
The United States banned the import of Russian metal a year ago, while imports from China are already subject to a blanket 10 per cent duty on Chinese goods.
So, rather than LME-stored metal moving directly to the United States, it is more likely that South American shipments will be re-routed and LME metal used to offset the resulting supply chain gaps.
It is even possible, as happened last year, that Chinese producers end up delivering metal to LME warehouses in Asia as a high US premium generates a global round-about of metal.
COMING HOME
US Secretary of Commerce Howard Lutnick has 270 days to prepare the Section 232 report on copper but every indication is that it will be fast-tracked.
There also seems little doubt as to what the findings will be, given Lutnick has accused global actors of “attacking our domestic production.”
“It’s time for copper to come home,” Lutnick said at Tuesday’s press briefing.
It’s highly unlikely tariffs alone will reverse the tide of copper history, which has seen ever more processing capacity migrate to China.
But he’s right that there’s probably a lot of copper on its way to US home soil. It’s just a case of where it comes from and how much market turbulence is caused by getting it there.