RESOLVING THE LEDGER
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One specialist arbitrage trade on a metal commodity is evolving into a real-time gauge of U.S. tariff risk.
Copper — seen as a broader economic barometer, with the industrial metal a key component in construction, electronics and transportation — has been on a tear for more than a year, with futures reaching a record high of almost $6.90 per pound last week.
The spread between U.S. COMEX futures and London Metal Exchange prices has historically been used by physical traders, banks, hedge funds, producers and consumers to profit from temporary price differences and hedge against price risk between the two markets.
The arbitrage was historically driven by factors such as Chinese demand shocks or supply disruption in South America.
Now, though, Societe Generale analysts say the trade has been upended by the prospect of fresh Section 232 tariffs on refined copper, pending a White House investigation, with investors increasingly using the COMEX premium as a gauge of further duties.
The U.S. already charges a 50% levy on imports of semi-finished copper products and certain other products made with copper. The Commerce Department has recommended a phased universal tariff of 15% on refined copper from Jan. 1, 2027, rising to 30% on Jan. 1, 2028.
Copper. "The COMEX-LME spread has increasingly become a gauge of U.S. tariff expectations, with a wider premium signaling greater perceived tariff risk and continuing to pull metal into the U.S.," Ewa Manthey, commodities strategist at ING, told CNBC via email.
The U.S. imported more than 200,000 metric tons of copper in July — its highest level in 12 years.
SocGen analysts led by Mike Haigh, head of FIC and commodity research, said U.S. policymakers have become increasingly concerned about the country's reliance on imported refined copper as AI infrastructure, grid modernization, and defense spending turbo-charge global demand.
Its Section 232 probe reflects a broader objective in "securing access to a material seen as critical to both economic growth and national security," he said
To translate the spread into tariff odds, SocGen modelled the cost of moving LME-grade copper from European warehouses to the U.S. East Coast, and compared that all-in delivered price with COMEX futures. Analysts said the current COMEX premium over fully delivered LME metal implies a 14.6% likelihood of the Commerce Secretary's recommended phased universal tariff of 15% by January 2027.
That rises to a 37% probability of a 30% duty by January 2028.
Natalie Scott-Gray, senior metals demand strategist at StoneX, said the overdue U.S. Section 232 decision on refined copper is now the "single biggest catalyst" facing the copper market. In a recent market commentary, Scott-Gray said comprehensive tariffs would squeeze supply outside the U.S. In contrast, no tariffs would unwind the COMEX-LME arbitrage.
Manthey said a wider premium remains supportive for copper prices near term, "particularly as mine supply remains tight and competition for available metal between the U.S. and China intensifies."
"We remain constructive on copper, although tariff uncertainty means volatility is likely to stay elevated," she added.
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