Duty Paid Vs. Duty Unpaid on the CME

𝗪𝗵𝗮𝘁'𝘀 𝘁𝗵𝗲 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝗰𝗲 𝗯𝗲𝘁𝘄𝗲𝗲𝗻 𝗮 𝗱𝘂𝘁𝘆 𝗽𝗮𝗶𝗱 𝗮𝗻𝗱 𝗱𝘂𝘁𝘆 𝘂𝗻𝗽𝗮𝗶𝗱 𝗰𝗼𝗻𝘁𝗿𝗮𝗰𝘁 𝗼𝗻 𝘁𝗵𝗲 𝗖𝗠𝗘...𝗮𝗻𝗱 𝘄𝗵𝘆 𝗶𝘀 𝘁𝗵𝗮𝘁 𝗮 𝗰𝗿𝘂𝗰𝗶𝗮𝗹 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝗰𝗲?

Recently, traders rushed to ship hundreds of thousands of tons of copper to the US to take advantage of the LME/CME arbitrage, which peaked above $2000/mt.

But why the rush? Why couldn’t they just deliver copper in-bond to the FTZ warehouse and warrant the material?

Here’s the key:
On the 𝗟𝗠𝗘, copper can be delivered duty-unpaid.
On the 𝗖𝗠𝗘, copper 𝗺𝘂𝘀𝘁 𝗯𝗲 𝗱𝘂𝘁𝘆-𝗽𝗮𝗶𝗱 𝗮𝗻𝗱 𝗰𝘂𝘀𝘁𝗼𝗺𝘀 𝗰𝗹𝗲𝗮𝗿𝗲𝗱 before it can become a warrant.

This is likely because CME copper delivery points are exclusively within the US.

Since traders were unlikely to create hundreds of thousands of tons of new physical shorts with consumers, they needed CME as a delivery point. If new duties had been enacted before arrival, they would have faced a hefty bill to deliver onto the exchange.

𝗪𝗵𝗮𝘁 𝗮𝗯𝗼𝘂𝘁 𝗮𝗹𝘂𝗺𝗶𝗻𝘂𝗺?

Aluminum is different: It’s a duty-unpaid contract on the CME. Traders can deliver material into exchange warehouses without clearing it for consumption first. CME Aluminum has delivery points across the US, Europe, and Asia making it a global contract.

So even though there’s currently a 25% tariff on aluminum imports into the US (up from 10% since 2018), there’s no big rush to deliver aluminum like we saw with copper. Why?

Two big reasons:

𝗠𝗶𝗻𝗶𝗺𝗮𝗹 𝗟𝗠𝗘/𝗖𝗠𝗘 𝗮𝗹𝘂𝗺𝗶𝗻𝘂𝗺 𝗮𝗿𝗯 - because the CME price is duty-unpaid, the arbitrage remains low.

𝗣𝗵𝘆𝘀𝗶𝗰𝗮𝗹 𝗰𝗼𝗻𝘁𝗿𝗮𝗰𝘁𝘀 𝘂𝘀𝗲 𝘁𝗵𝗲 𝗳𝗹𝗼𝗮𝘁𝗶𝗻𝗴 𝗠𝗶𝗱𝘄𝗲𝘀𝘁 𝗱𝘂𝘁𝘆-𝗽𝗮𝗶𝗱 𝗽𝗿𝗲𝗺𝗶𝘂𝗺, meaning domestic aluminum prices already adjust monthly to any import costs.

In short, copper traders had a window of opportunity before duties could hit.
Aluminum traders? No real incentive - the premium already captures duty changes.

And if you’re wondering why your 🍺 beer can costs more these days...Yep, tariffs on aluminum are the main culprit!