Copper Tariffs
Speculating on final tariff levels, when tariffs might come in, or what products will be affected is extremely difficult. Even after Lutnick went on TV yesterday and said by July 31st or August 1st, the only person who really knows is Trump, and he might change his mind 100 times in the next few weeks.
Markets are not waiting for any clarity with new CME record highs being printed yesterday and the arb blowing out to $3,000/mt, before both price and arb faded. Whether this is more buy the rumor, sell the news remains to be seen.
Traders that have already imported cathode to the US but were waiting to execute arb trades have played this extremely well and are now likely to lock in these levels. If they do, we will probably see an increase of cme copper stocks as this metal is warranted in the coming weeks.
More precarious is the cathode that has been purchased by traders and is either currently on the water or will ship in the coming months. If tariffs are implemented before metal gets to the US, traders will be faced with a huge import bill that negates any potential arbitrage profits.
One potential avenue for this metal would be for traders to continue to wait to execute arb. If material arrives to the US and can be imported before tariffs are enacted, arb can be booked and material can be delivered to the CME as planned.
If tariffs are enacted while metal is on the water, material could instead be delivered to LME warehouses in the US. Unlike on the CME which is a duty paid contract for copper, material can be delivered to LME warehouse in bond and placed in the foreign trade zone, without being cleared for US customs.
Warehouses are usually happy to offer rent-share agreements for freshly warranted material and once in the FTZ, these warrants would be unlikely to be cancelled and removed, increasing the value of that rent-share.
If someone wanted to consume this metal in the US they would have to pay the tariff at the point of removal from the FTZ. The metal could in theory be cancelled and re-exported from the US in bond without the need to customs clear the material and pay the tariff, but the cost involved in cancelling, trucking in-bond, loading to vessel, and paying ocean freight to a different global location would likely be prohibitive. This makes the LME rent-share option a decent back-up plan.
It would almost certainly be less costly than re-routing metal to a different, non-US location. The caveat here being that it requires the cathode to be both CME and LME registered for delivery. One risk here would be that if tariffs were removed in the future, warrants would likely be cancelled (duty free), ending the rent share.
If you would like a more complete explanation on how these trades work, the mechanics of warranting, rent shares, or execution of arbitrage trades, send a message on LinkedIn or to Samuel.basi@perfectlyhedged.com
