No copper tariffs, no interest rate cuts

I never expected Trump to cancel the tariffs on refined copper and only impose tariffs on finished products. Although some friends had asked me about this possibility before, I clearly overestimated Trump's policy logic at that time.

My thoughts at the time were:

1. Trump could not bring back the entire copper smelting industry, but he might need to make some backups domestically.

2. If tariffs are only imposed on finished products, it may not meet Trump's expectations.

A complete copper industry certainly spans from upstream ore, to midstream smelting, to downstream consumption. The U.S. has quite a few copper mines, and there are actually many in production, with some domestic appliance brands also consuming downstream. What is relatively lacking is smelting plants.

The simplest thought is, of course, to build smelting plants if they are lacking, but the problem is that smelting plants are not economically viable. The processing fees for Chinese smelting plants have previously been mentioned as negative... So, it's like when you go to the market to buy meat as a child; if you buy lean meat, you need to pair it with some fatty meat. Many smelting plants are built together with mines, which means that some of the money from the mining side subsidizes the losses of the smelting plants. This calculation can often be clarified mainly for two reasons:

First, if you don't build a smelting plant, others won't let you build a mine.

Second, if some mines are in less favorable geographical locations, smelting plants can indeed reduce costs.

This is also why, although everyone knows that the U.S. lacks smelting plants, they felt that imposing tariffs on refined copper might be reasonable.

Under this logic, copper prices in the U.S. would reach a very high level, stimulating domestic investors to start investing in copper mines, and only with the presence of mines might there be a story of supporting the construction of smelting plants. The comments from Southern Copper's conference call yesterday partially echoed this point; the smelting fees are too low, and there is no interest in building smelting plants under uncertainty and low prices, needing to wait for the situation to become clearer.

Therefore, currently imposing tariffs on finished products while not on raw materials signifies a shift in the entire policy approach. Previously, with Comex copper at $5.5 per pound, profits were extremely high, stimulating both domestic mining and smelting capacity increases; now, under finished product tariffs, it aims to stimulate more people to invest in a non-profitable smelting plant purely based on the price difference.

I think the logic of the former is at least understandable, while the latter essentially requires Americans to build a non-profitable factory, relying solely on the price difference between domestic and foreign materials to make a profit. I think the difficulty is quite high.

So, I do feel that this new policy approach may not achieve much effect. I saw Goldman Sachs' statement that the U.S. might have reached an agreement with countries like Indonesia and Congo to ensure supply, which somewhat sounds like a patch-up. In peacetime, no one would give up the best market in the U.S., but when it comes to ensuring supply, it requires more than just a piece of paper.

However, returning to the specific situation, when the price difference between Comex and LME quickly converges, the previously mentioned return of Comex copper will be slightly more than before, as there is no longer $6 per pound copper, and the demand for stockpiling copper in the U.S. will weaken, even more than when there was a 50% tariff.

As for the LME and SHFE markets, there may be more seasonal inventory accumulation. Regarding subsequent demand, I find it somewhat amusing that some refined copper that has already been shipped to the U.S. may need to be sent to other places for refining before being shipped back to the U.S But overall, if Trump does not continue to change his mind on the copper issue, he indeed chooses to back down once again and fails to achieve his goals. For Comex copper traders, it is truly heartbreaking, while for the LME and SHFE markets, copper trading may somewhat return to supply and demand rather than trade policy. The previous view was that this is a buy-on-dips commodity, and currently, the probability of a dip seems slightly higher than before.

This is certainly also related to the Federal Reserve. Yesterday, we saw two dissenting votes that we haven't seen in many years, but Powell really has no way to cut rates given the current data, and he did not preset a path for September, which means that rate cuts in the second half of this year are still data-driven.

At the beginning of the year, it was mentioned that Trump has demands for the midterm elections, and the most reasonable path is actually the one Reagan took: first, let the economy weaken, then cut rates and taxes to deregulate, digging an economic pit and then climbing out. For various reasons, Trump did not complete the spending cuts, and tariffs constrained the Federal Reserve, preventing rate cuts. At some point in April, he did cause economic disturbances, but he backed down too early, resulting in the Fed not cutting rates, and at that time, his embargo on China meant that if political issues arose, it would be his problem, not the Fed's.

Many friends who previously watched the U.S. stock market and oil, like some big shots in the U.S., expressed great outrage at Trump's policies. I didn't understand before because I was not familiar with these two commodities, but after seeing the twists and turns of copper tariffs, I somewhat understood.

What Trump needs is exposure and topic relevance, but when problems arise, the reversal often happens too quickly and too early. Many of his policies are not completely illogical, but any logical policy that reverses within three months will not be implemented by anyone. This leads to very dismal outcomes in the end.

At this point, my biggest regret and gain is that many friends previously said that Trump's era is filled with unimaginable changes. Some out-of-the-money options, which seemed impossible, have shifted from being favored by retail investors and insiders to becoming commodities that more institutional investors are willing to consider. Indeed, in any situation, the possibility of TACO should be considered, no matter how reasonable the policy seems. What Trump needs is publicity and popularity, not rationality and logic.

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