By Andy Home
LONDON (Reuters) – U.S. President Donald Trump hasn’t yet imposed import tariffs on copper but the market is already pricing in the likelihood that the red metal will be next on the list after aluminium and steel.
The arbitrage between the CME and the London Metal Exchange (LME) contracts has blown wider in recent days, with the CME premium exceeding $1,000 per metric ton earlier this week.
Given that LME three-month copper is currently trading around $9,400 per ton, the transatlantic gap implies the market is expecting a 10% tariff at the very least.
Were Trump to go for the same blanket 25% tariffs that have been applied to imports of aluminium and steel, there is obviously further upside potential for the CME premium.
Overlooked for now is how Doctor Copper would likely react to an escalating tariff war with all the negative implications for global growth.
MIND THE WIDENING GAP
The aluminium tariff trade is playing out in the CME’s U.S. Midwest premium contract because the CME’s underlying aluminium contract mirrors the LME’s international delivery status.
The CME copper contract, by contrast, is customs cleared with only domestic delivery locations, meaning it must reflect any inherent premium for U.S. delivery.
That makes the CME premium over its international London peer a tradable gauge of any potential U.S. tariffs on copper imports.
And right now it is trading at record highs, eclipsing even last year’s short squeeze blow-out.
CME copper stocks have recovered from the depleted levels that helped fuel that squeeze and now total over 100,000 tons.
But U.S. consumers are highly vulnerable to any tariff barriers since the country is still reliant on imports for around 45% of domestic consumption, according to the U.S. Geological Survey (USGS).
Hence the price sensitivity to Trump’s tariff threats, although what level of tariffs may be applied and against which countries remains a known unknown for now.
The blanket nature of this week’s announced tariffs on aluminium and the potential for even higher duties in the event of retaliation by trading partners has evidently spooked the copper market, forcing the arbitrage ever wider.
DAMAGE IMPACT
The immediate focus of the copper tariff trade is refined metal, which is understandable given that the United States imported just over 800,000 tons in 2024, compared with domestic production of 850,000 tons, according to the USGS.
However, trade flows would adjust over time and the CME premium is already providing an incentive for more metal to head to the United States.
The tariff impact could be much messier when it comes to copper products, given the complex flows of material between the United States and its Canadian and Mexican neighbours, both of which are threatened with 25% tariffs.
The United States exports copper wire to Mexico to be manufactured into automotive parts such as wiring harnesses and electric motors which are then shipped back across the border.
This trade amounts to 220,000 tons of contained copper each year, according to analysts at Project Blue. Slapping high tariffs on such imports is likely to see harness assembly relocate from Mexico to lower-cost Asian countries with negative knock-on effects for both Mexican and U.S. companies in the automotive supply chain.
Both Mexico and Canada are also key suppliers of copper scrap to American processors, meaning tariffs could potentially divert flows to other countries, most likely China, to the detriment of domestic U.S. secondary production.
TARIFF DRAG
The interconnectedness of North American copper flows is just part of a bigger complex globalised picture, leaving the metal highly vulnerable to the sort of shift in trading patterns likely to ensue from U.S. tariffs.
Doctor Copper has earned the honorific title precisely because the metal is so embedded in the global industrial economy.
Clearly, the potential for tit-for-tat tariffs between the United States and its trading partners could act as a major drag on consumption.
This has not yet been priced in by the market. The LME copper price has risen by 7% since the start of January, fuelled by expectations of improved demand, particularly in China.
But China is also in the cross-hairs of the new Trump administration along with just about everyone else.
If the tariff wars have begun, copper is going to be a casualty. But that will be reflected in the international price rather than the U.S. price, implying a further fracturing between CME and LME markets.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Sharon Singleton)
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