Column: Copper’s US tariff premium crushed by wave of imports

Ever since the Trump administration announced a so-called Section 232 investigation into US imports of the red metal in February, traders have been rushing to get metal into the country to lock in a potential tariff windfall.

The physical response has been so powerful that it has caused the futures arbitrage between the CME contract and the London Metal Exchange (LME) price to collapse.

Waiting for Trump

The copper market has been betting that a US tariff will be imposed at a rate of 25%, matching those already in place for both steel and aluminum imports.

The tariff trade has been manifest in the premium commanded by the CME’s customs-cleared US contract over the international price traded on LME.

Just three weeks ago the cash premium was close to $1,600 per metric ton, equivalent to 17% of the LME price. It has since collapsed to $600 per ton, or just 6% of the London price.

It’s not as if anyone doesn’t expect tariffs to come, although the timing remains uncertain. A Section 232 investigation comes with a 270-day deadline, but White House officials have promised a resolution in “Trump time”, whatever that means.

Rather, the sheer volume of metal arriving in the US and the simultaneous drawdown of LME warehouse stocks is forcing the transatlantic price gap to narrow.

Metal on the move

US imports of refined copper have surged to 40,000 tons per week since late March from 14,000 tons per week before then, according to analysts at Morgan Stanley.

Metal has been pouring into CME warehouses over the same period, most of it arriving at New Orleans.

CME copper inventory has risen by 81% since the start of the year and is now at an eight-year high of 168,563 short tons (152,919 metric tons).

CME time-spreads are in contango, unlike those on the LME, where the benchmark cash-to-three-months spread has shifted to a $30-per ton backwardation as stocks fall.

LME copper inventory has slumped to a one-year low of 179,375 tons, with 40% of what remains awaiting physical load-out.

The raid on LME stocks has been focused on copper that can be delivered against the CME contract or swapped with consumers for CME brands.

That has left LME stocks largely composed of Russian and Chinese copper brands. They accounted for 98% of the 129,200 tons of warranted inventory at the end of April.

The US tariff pull has extended as far as China, where Shanghai Futures Exchange inventory has fallen from its Lunar New Year holiday peak of 268,337 tons to 108,142 tons.

China’s imports of refined copper fell 5% on a year-over-year basis and 20% on a quarter-over-quarter basis in the January-March period as metal was diverted to the US.

Scrap flows slow

The regional imbalances caused by the threat of a US copper tariff have been compounded by the impact on flows of copper scrap from the US to China.

China is the main destination for US shipments of recyclable copper, and it imported 441,000 tons last year.

That trade has ground to a halt due to uncertainty around both a copper-specific tariff and the bigger reciprocal tariff picture.

A growing mountain of refined metal in the US is matched by an accumulating surplus of recyclable copper.

The 90-day relaxation of reciprocal tariffs may free up some of this material, but for how long is dependent on whether the two sides can de-escalate their trade dispute.

Distorted picture

It’s worth noting that global exchange copper inventory hasn’t changed much this year, with stocks hovering around the 500,000-ton level, down just 1,700 tons from the start of January.

But there has been a wholesale redistribution of physical metal from the rest of the world to the US.

This process is still playing out and will likely continue doing so until the Trump administration decides on whether to impose a copper import tariff and at what level.

The CME-LME arbitrage should in theory stabilize at the announced tariff rate, but quite evidently that’s not going to happen overnight given the rising volume of inventory weighing on the US component of the trade.

And the longer it takes for the White House to make up its mind, the higher the US copper mountain is going to grow.