US Copper Import Tariffs May Come in Higher and Sooner Than Expected
The copper markets have been rocked overnight on the back of President Trump’s comments that the ongoing investigation into US copper import tariffs under Section 232 of the Trade Expansion act 1962, will result in higher-than-expected tariffs on copper, with the date of implementation, possibly sooner than markets had expected.
So what do we know so far?
As it stands, following the signing of the EO into the investigation on US copper tariffs, there have been four major uncertainties, centering around:
• When the investigation decision be announced
• What level will a potential tariff be set at (if it comes in)
• Will the tariff include any country exemptions (for say major producing countries like Canada or Chile)
• And will the investigation also extend to area’s like copper scrap exports
As it stands – what we know so far is:
• On the Timing for tariffs: Commerce Secretary Howard Lutnick outlined that the levy would be in place in late July or 1st August
• What level will the tariff be set at (if indeed it does come in): Trump has outlined 50%, higher than previous expectation which ranged from 10-25%
• On the question of will the tariff include any country exemptions: This has still not been disclosed
• Will the investigation also extend to area’s like copper scrap exports: Again, this has not been addressed, but we are aware that organizations such as the Copper Development Association have called for tariff exemptions on refined and scrap copper imports, but support tariffs on recyclable high-purity copper scrap exports.
What market reaction have we seen?
US Copper prices posted a record one-day spike on Tuesday, pushing COMEX copper to an all-time high, before modestly paring some of those gains in morning trading today.
Meanwhile, LME benchmark prices have come under pressure falling by 1.9% in morning trading, with the LME 3M price standing at $9,607/t.
As a result, we have seen the COMEX-LME arbitrage jump to over $2,600/t (interestingly still not fully pricing in the 50% tariff).
LME Cash-3M Spread Versus LME 3M Price
Source: Bloomberg
COMEX-LME Arbitrage
Source: Bloomberg
Taking all of this into account – what do these latest developments mean for the copper market and copper prices?
Ultimately, until there is certainty on the outcome of the investigation we cannot assume that the latest announcement is solid fact. However, as we see it:
1. The quicker that a tariff ruling is made on copper imports, the quicker we can see a return to normal trade patterns, which will start to east 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.
So, in the scenario outlined of tariffs coming 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 at their elevated level as future supply risks grown, given that the US has a 44% reliance on copper imports for demand.
Coming to price movements for copper, following the sharp move in time-spread on the LME, with the cash-3M spread posting a contango for the first time since late April this morning, we are of the view that copper prices will likely return back towards the $9,000/t 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 of late July – early August.
Seasonality Stock Charts: COMEX, LME, SHFE
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Source: Bloomberg
