COLUMN-Copper's physical tariff trade is rapidly unwinding: Andy Home

By Andy Home

LONDON, July 24 (Reuters) - U.S. President Donald Trump sprang a double surprise on the copper market when he announced import tariffs of 50% effective next month.

The market was betting that tariffs would be set lower and come with a longer lead-time.

The futures market is rapidly readjusting, with the CME copper contract HGcv1 punching out record highs as it prices in the higher tariff differential with the London Metal Exchange (LME) contract.

So too is the physical supply chain. The August 1 start date signals the end of the race to ship physical metal to the United States to capture the tariff arbitrage.

A lucky few with cargoes already afloat may yet cross the finishing line in time, but the physical tariff trade is rapidly unwinding.

That's already manifest in rising inventory and loosening time-spreads on the London market.

BONANZA TRADE

The tariff trade has been a bonanza for merchants and traders ever since the Trump administration announced the launch of a national security investigation into U.S. copper import dependency back in February.

It's been such a money-spinner that they've stripped both the physical supply chain and markets of last resort, such as the LME and the Shanghai Futures Exchange (ShFE), for available copper.

U.S. imports of refined copper surged to 541,600 metric tons between March and May, equivalent to 60% of imports over the whole of 2024.

Flows from traditional sources such as Chile and Peru have accelerated, and they've been supplemented by arrivals of Australian, Asian and European brands of copper.

CME inventory has more than doubled since the start of March and at 222,723 tons is now just shy of the 2018 peak.

More copper is sitting in the off-market shadows. Analysts are pegging the excess at somewhere between 400,000 and 500,000 tons, which in the view of Citi would "negate U.S. copper import demand for the rest of 2025."

Allowing for continued flows of metal under long-term supply contracts, it could take up to nine months to work off the mountain of metal, according to Macquarie Bank.

HONG KONG ACCELERATOR

It won't take that long for the global supply chain to adjust, judging by rising stocks and looser spreads on the London market.

Indeed, the benchmark cash to three months period CMCU0-3 flipped from backwardation to contango almost immediately on the tariff confirmation, as 25,000 tons of copper earmarked for physical load-out were dumped back in the market.

With the shipping window to the United States now closed, LME inventory has jumped by 33,525 tons this month, thanks in large part to shipments by Chinese producers.

Chinese exports of refined copper have been accelerating since March in response to the U.S. drain on LME stocks and the resulting spread tightness.

LME warehouses in Taiwan and South Korea have traditionally been the prime locations for receiving Chinese metal, but the opening of exchange warehouses in Hong Kong now allows for faster delivery.

Exchange warehouses on the island have already received 5,975 tons of copper since opening for business on July 15.

There may be more to come. The LME benchmark spread is now in a comfortable contango of $66 per ton, compared with a backwardation of more than $300 per ton at the end of June.

WHO'S THE REAL DOCTOR COPPER?

Trump's tariffs have split global copper pricing between the United States and the rest of the world.

Copper bulls are cheering CME's rise to new historic highs, but this is a direct reaction to higher than expected import tariffs rather than a reflection of global market dynamics.

The CME spot premium over the LME price has jumped from $1,233 per ton on July 7 to $3,095. In terms of the implied tariff impact on U.S. pricing, the CME price differential has widened from 13% to 31% since Trump pulled the tariff trigger.

The LME three-month price CMCU3, by contrast, remains locked in a sideways range just below $10,000 per ton, still a good way short of the record highs above $11,000 per ton seen in May 2024.

Despite the mass relocation of global inventory towards the United States, total exchange stocks are little changed on the start of the year.

Including both LME off-warrant stocks and copper registered with ShFE's international INE arm, global exchange inventory is currently down by just 18,000 tons on the start of January. The stable LME price, rather than the overheated U.S. price, captures that ambiguous reality.

The devilish detail in the new tariffs is conspicuously lacking. Will copper product imports be included? Will there be restrictions on U.S. exports of copper scrap? Will there be exemptions for favoured suppliers?

We don't yet know, but it's clear that global pricing has just fractured.

Doctor Copper now has a transatlantic double, but the real reflector of global manufacturing activity is the one in London, not the U.S. doppelganger.

The opinions expressed here are those of the author, a columnist for Reuters.