In today’s Issue:

  • Will the gold tariff spike happen to copper next?
  • Would you take $400 a tonne to reroute to Hawaii?
  • Which copper miners you buy depends on whether you like tacos

Trump’s tariff threats blew up the gold market back in January. Gold went on to be the best performing asset class in the world, again. Now that copper is copping the tariff threats, is it the next metal to outshine the stock market?

It’s certainly off to a flying start. The New York copper price is up 12% since Trump’s tariff announcement. But things are not quite what they seem. Copper mining stocks are DOWN about 1.5% over the same timeframe!

Why?

Well, you might think there is one global price for copper. But you’d be wrong. Copper contracts trade in London and Shanghai too. And the copper price actually fell slightly in those places after Trump’s tariff threats.

It seems copper prices are diverging, not rising.

Traders who don’t want to pay a 50% tariff to import copper in August are buying it in the US today. This bids up the US price relative to other places.

The big question is whether an arbitrage can begin, as it did for gold. That would bid up prices outside the US and bring them back in line.

A familiar opportunity?

Back in January, traders could make whopping gains literally flying gold across the Atlantic. The New York gold price was up to $60 an ounce higher than London’s. That’s about 40 times higher than usual.

But gold dealers, and even the Bank of England, couldn’t keep up with demand. This triggered all sorts of conspiracy theories. Had the Bank of England secretly sold all its gold?

Copper doesn’t quite lend itself to the same sorts of creative narratives. Nor is it economic to fly copper across the Atlantic for arbitrage.

In fact, I presumed copper simply wouldn’t feature the sort of arbitrage we saw for gold in January. That would allow the price differential to persist.

Traders can’t just buy copper in London and Shanghai on the cheap and then fly it to the US where it sells for more.

But the arbitrage seems to be beginning already according to Bloomberg. In a different way:

Copper traders racing to get cargoes into the US are looking to shift deliveries into Hawaii and Puerto Rico to cut shipment times, as Donald Trump’s plan for 50% tariffs threatens to slam the door on a hugely profitable arbitrage trade that has gripped the industry for months.

New York futures spiked to a roughly 25% premium over international benchmark prices in the wake of Trump’s initial announcement on Tuesday, which means traders who can deliver metal into the US before the new levies stand to capture an even larger profit — or face big losses if the clock runs out. 

Some traders desperate to get their hands on last-minute metal are willing to pay big premiums — offering close to $400 a ton on top of London Metal Exchange prices — and seeking to divert shipments headed for China toward the US instead, according to people involved in the market, who asked not to be identified discussing commercially sensitive information. 

I wonder what the duty-free allowance is for copper at US airports…

But Bloomberg also reckons the arbitrage window has now closed:

Shipments from Asia to New Orleans typically take over a month, so any traders sending metal now would risk being caught on the wrong side of the tariffs, which are due to become effective at the start of next month.

But the journey to Hawaii is roughly ten days, and at least one trader has already completed a shipment to the Pacific state, according to a person familiar with the matter. 

So, in the short term, there could be a glut of copper outside the US as importers that don’t want to pay a 50% tariff on arrival in the US try to sell elsewhere.

I’m also worried about the longer-term impact…

Tariffs will split the copper market, not spike it

The point of Trump’s tariffs is to encourage copper mining and smelting inside the US. He’s making imports of copper less attractive to create an incentive for investors to produce copper inside the US.

This means the world will have two separate copper markets. One outside the US and one inside.

Those companies already inside the US will benefit from tariffs. Those outside are at risk of a glut as US buyers don’t show up anymore.

The US imports half of its refined copper. If that demand is met from domestic production over the next few years, that cuts a huge source of demand from the rest of the world’s market.

Of course, all this takes years to play out. It takes a long time to build a copper smelter or mine. But markets price in the future.

Which makes copper opportunities a simple bet in the meantime…

If you believe “Trump Always Chickens Out,” which has become known as TACO, then copper miners outside the US are a buying opportunity right now. Once Trump is forced to reverse his tariffs, they’ll soar as the copper market rebalances.

Until next time,

Nick Hubble
Editor at Large, Investor’s Daily