The previous arbitrage trading collapse has led to short-term downside risks for copper prices

Trump's copper tariff policy has taken a sharp turn, as the arbitrage trades triggered by previous tariff expectations face liquidation, and the excess copper inventory in the United States will be reallocated, all of which will put pressure on copper prices.

On August 1, according to news from the Chasing Wind Trading Desk, UBS Group AG stated in its latest research report that Trump's copper tariff policy has shifted from imposing a 50% tariff to almost complete exemption, causing COMEX copper prices to plummet by more than 20%, with spot premiums approaching zero.

According to CCTV News, on July 30 local time, U.S. President Trump signed a notice announcing that starting August 1, only a 50% tariff will be imposed on semi-finished products such as copper pipes, copper wires, and cables, while refined copper, including cathode and anode copper, which is mainstream in international trade, will be exempted.

UBS stated, regardless of whether the tariffs are implemented, the "U.S. copper tariff trades" generated by previous arbitrage expectations will face liquidation, putting downward pressure on prices, and the cancellation of tariffs is the most negative scenario.

The report also pointed out that in addition to the downward pressure on copper prices from the liquidation of arbitrage trades, a large backlog of copper inventory in the U.S. faces reallocation, with an estimated 500,000 to 700,000 tons of excess inventory needing 6 to 12 months to digest, during which copper prices will continue to be under pressure.

U.S. Tariff Exemption Leads to Reversal of Arbitrage Trades

The report stated that the U.S. tariff exemption exceeded market expectations. UBS originally believed that the U.S. was more likely to grant partial exemptions like it did for steel and aluminum products, rather than substantively canceling the copper tariffs.

UBS pointed out, although the U.S. cancellation of the proposed copper tariff policy exceeded expectations (originally expected to grant partial exemptions like for steel and aluminum), whether tariffs are imposed or canceled, it will lead to the liquidation of "U.S. copper tariff trades," putting downward pressure on prices, with the cancellation of tariffs having a more significant negative impact on copper prices.

According to a previous article from Jianwen, Trump's unexpected move caused the arbitrage strategy, hailed as "one of the most profitable commodity trades in modern history," to collapse instantly.

Since Trump first hinted at possible tariffs earlier this year, U.S. copper prices have soared significantly compared to other global markets. To obtain high premiums, global traders rushed to ship copper to U.S. ports.

The core of this strategy lies in the huge price difference between New York Comex copper futures and London Metal Exchange (LME) copper futures. Just a week ago, the premium for Comex copper exceeded 20% above the LME benchmark price. However, once the news of the tariff exemption broke, the price difference quickly vanished

"Excess Inventory" Piling Up as a Hidden Danger

Although the United States accounts for less than 10% of global copper demand (approximately 1.7 million tons), tariff expectations have severely distorted global copper trade.

Research reports indicate that the rising premium of Comex relative to LME has attracted a large influx of metals into the United States, reducing metal supplies in other major markets including China (accounting for 55%/15 million tons) and Europe (accounting for 15%/3.6 million tons).

Data shows that from January to May this year, U.S. refined copper imports increased by approximately 400,000 tons year-on-year (+130%), and increased by 330,000 tons (+95%) compared to the five-year average.

UBS stated that since the underlying demand may remain flat, most of these import increments have accumulated as "excess inventory." Comex inventory has increased by 160,000 tons year-to-date, and the remaining import increment of over 250,000 tons may exist in the form of unreported inventory.

UBS expects that the United States will accumulate 500,000 to 700,000 tons of excess inventory by the end of July. Based on the annualized refined copper demand in the U.S. of approximately 1.7 million tons, this excess inventory is equivalent to 30-40% of annual demand.

As the Comex-LME price spread converges to zero, the United States will digest this inventory in the next 6-12 months rather than increase imports. Refined copper originally destined for the United States (mainly from Chile/Canada, with a monthly supply of over 200,000 tons) will flow back into other markets, and if Comex trades at a discount to LME, the excess inventory may even be "dumped."