U.S. tariff threat brings boom time for physical copper traders

Andy Home

While financial markets gyrate to the uncertain beat of U.S. President Donald Trump’s unpredictable tariffs, physical copper traders are reaping the rewards of the turmoil.

The threat of U.S. tariffs on copper imports has opened up a once-in-a-lifetime opportunity for those in the business of shifting physical metal around the globe.

The CME copper contract is now trading at a significant premium to the London Metal Exchange (LME) contract , opening up a massive import arbitrage opportunity.

There is an ongoing scramble to ship physical copper to the United States to beat the tariff deadline with knock-on impacts on global trading patterns.

While physical metal merchants make hay, investors are uncommitted, fearing the chilling effect of a tariff war on the future copper price.

Tariff turmoil

Copper traders have been trying to price in the likelihood of U.S. tariffs since Mr. Trump ordered an investigation into copper imports on national security grounds.

The tariff trade comes in the form of the premium commanded by the CME price, which is a U.S. customs-cleared price, over the international LME price.

And it’s proving to be a highly volatile trade, reflecting the White House’s contradictory rhetoric.

In his Address to Congress last week, Mr. Trump said he had imposed “a 25% tariff on foreign aluminum, copper, lumber, and steel”. That came as something of a shock to the copper market, given the Section 232 investigation into imports was only announced last month.

The CME premium to London briefly flared out to over $1,000 per metric ton on the comment before retreating on the collective assessment that Mr. Trump’s mention of copper was probably only a slip of the tariff tongue.

Copper rush

Those who make their money by profiting from regional differentials in pricing don’t need to worry too much about the volatile arbitrage between CME and LME copper prices.

The CME premium over London, basis May, closed last week around $800 per ton, meaning the shipment of physical metal to the U.S. is already a very profitable business.

It will become even more profitable if tariffs are implemented. The challenge is simply to get possession of as much physical metal as possible and clear it through U.S. customs before any change in import duty.

The copper rush has spread to the LME, where 115,800 tons of registered metal have been cancelled in preparation for physical load-out in the last two weeks.

The volume of on-warrant copper stocks in the LME warehouse system has fallen to a nine-month low of 147,875 tons.

It’s unlikely that this metal is going directly to the United States, given the low ratio of LME stocks that constitutes good delivery against the CME contract.

Rather, what is being grabbed in LME warehouses is more likely going to be swapped with producers and users against CME-deliverable brands from Chile, Mexico and Peru.

Dislocations

But it’s a sign that availability is tightening as physical copper is either directly shipped or re-routed to the United States.

Unsurprisingly, LME time-spreads have contracted as available stocks have fallen. The cash-to-three-months period was last week flirting with backwardation for the first time since June last year.

That in turn has shifted the arbitrage between London and Shanghai markets, offering Chinese smelters an opportunity to export profitably.

Such is the ripple effect of potential U.S. tariffs through the global physical copper market.

The regional dislocations spell a bonanza for those trade houses with the physical market heft to capitalise on the supply-chain shifts.

Fund managers fear to tread

While physical traders are busy scouring the globe for the right sort of copper to ship to the United States, the investment community is largely side-lined.

Fund positioning on the CME copper contract is almost evenly split between bulls and bears, resulting in a marginal collective net long of just 8,721 contracts.

There is not just a transatlantic gap in copper pricing but also a commitment gap between physical and futures markets.

The investor community tends to play “Doctor Copper” as a macro trade, using the metal as a proxy to bet on global industrial growth.

However, the bigger economic picture is darkening as the U.S. administration ups tariffs on Chinese goods and threatens just about every trading partner with reciprocal tariffs.

The risk of recession is rising, according to a Reuters poll of North American economists.

That’s what keeping fund managers cautious on the prospect of higher copper prices over the rest of this year, even while they’re reluctant to go short a market that is also showing signs of tightness, albeit highly regionalised tightness.

But while Mr. Trump’s tariff turbulence confuses the futures market, the physical copper trade is wasting no time to make money in the here and now.

(The author is a columnist for Reuters)