Copper Rocked by Trump’s Surprise Announcement of 50% Tariffs – Dr. Copper Status Set to Return?
Please find the video recording:
https://www.youtube.com/watch?v=x4QaxQF9WXQ
Background of the Executive Order Investigation into US Copper Imports:
- Signed on 25th February, with a theoretical 270-day period for the investigation.
- If the outcome of the investigation was that foreign copper imports pose a threat to national security (with the US holding a 44% reliance on imports), then the Administration could enact tariffs within 15 days.
Given this, over the last four and half months, market players have been trying to forecast what the outcome of the investigation will be:
- Will tariffs come in?
- If so when?
- What tariff level will be set?
- Will tariffs contain country exemptions?
- Will tariffs contain exemptions on certain copper types or products?
- Will copper units already on route to the US ‘on the water’ be exempt from tariff deadlines?
How Has the Copper Market Reacted to the Uncertainty?
- US copper COMEX prices have been heavily underpinned versus the LME and SHFE
- An elevated US premium has incentivized significant amounts of copper into the country (around 500,000t over Jan-June)
- As a result, regional copper markets have been distorted, with material re-routed not just from major trading partners like Canada and Chile into the US, but also from markets of last resort such as the LME and SHFE.
- As re-rerouting has gone on this year, it has resulted in a significant scarcity of copper units outside of the US, with LME and SHFE inventories falling to their lowest level for this time of the year since 2023.
- The drawdown in LME on-warrant stocks has resulted in LME copper time spreads posting significant backwardations since April, with the view for LME copper prices (pre the 50% tariff announcement) to remain at elevated levels, tracking towards the $10,000t level.
COMEX-LME Spread
Source: Bloomberg
LME Cash-3M Spread
Source: Bloomberg
COMEX, LME & SHFE Copper Inventory
Source: Bloomberg
So where are we now?
Based on President Trump comments:
- Tariffs will come in at 50%, higher than expectations of between 10-25%
- Tariffs will be enacted on 1st August
However, there remain unknowns:
- Will tariffs contain country exemptions?
- Will tariffs contain exceptions on certain copper types or products?
- Will units already on route to the US (i.e. on a ship on the water) receive exceptions?
How have copper prices reacted to the latest announcement?
- US COMEX copper prices posted a record one-day spike in the aftermath of 8th July, pushing the contract to an all-time high, before modestly paring some of those gains.
- LME benchmark prices have come under pressure, on track to post their steepest weekly loss since early April.
- As a result, the COMEX-LME arbitrage rose above $2,700/t this week to a new record high, however, the spread has failed to price in the full 50% tariff.
Why is the market not pricing in a 50% tariff?
Firstly, not only is there an excess of US inventory already in the country, set against modest demand expectations for this year. But there is a risk that we will see a rapid increase in copper inflows into the US ahead of the tariff deadline. Indeed, we understand some material has been waiting on ships outside the US for the opportune time to be delivered. Meanwhile, we also expect that major trading partners will do what they can to limit the transit period. For example, South American producers may opt to delivery metal into a port in Puerto Rico, which is a US customs territory, over delivery to the mainland. While Asian market players may choose to re-route flows into Hawaii over New Orleans, reducing the transit time from one month down to ten days. In addition to this, there remains uncertainty over country-based exemptions and a general sense of tariff fatigue.
If tariffs are enacted, how can you model future copper trade flows?
Ultimately, until there is certainty in the outcome of the investigation, we cannot assume that the latest announcement is a solid fact. However, as we see it:
1. The quicker that a tariff ruling is made on copper imports, the faster we can see a return to normal trade patterns, which will start to ease the extreme scarcity of copper units ex-US.
2. The higher the tariff level, the sharper the reverse back to normal trade patterns is set to be, given the added expensive to ship material into the US.
3. If no exemptions are made to major producing countries like Chile, then again faster the reversal of flows to more normal trading patterns.
Given this, what does this mean for future copper prices?
In a scenario in which tariffs come in sooner than expected, at a higher level with potentially no country exemptions, then this in our view spells out a longer-term bearish outlook for LME copper prices. While US copper prices will remain elevated in the medium-term as future supply risks arise once more, given that the US has a 44% reliance on copper imports for demand.
Focusing on the outlook for LME 3M copper prices, following the sharp move in time-spreads from a backwardation into a contango this week, we are of the view that copper prices will likely return back towards the $9,000/t level in the coming months, with this latest development possibly the nail in the coffin for backwardations, which have been persistent since April.
However, we are cautious that the extreme tightness ex-US will take time to unwind, especially if the investigation does extend for longer than the outlined timeframe and/or we get country exemptions.
Bottom line, the implementation of higher than expected tariffs is likely to allow LME copper to regain its Dr. Copper status, with prices reflecting the health of the global industrial market, rather than just the risk of US import tariffs, which has been the case for the last few months.
