17 January 2025: The LME three-month copper price underperformed in the second half of last year, but it has bounced back in recent weeks. The market is being impacted by the threat of additional US tariffs, which has led to a surge in US copper prices relative to the LME. Also, China has cut its imports of copper scrap in response to a more uncertain environment for trade, which is restricting supply. Copper prices are being lifted by strong imports by China, as demand looks robust and there are signs of improvement in the troubled property market. Overall, we expect copper prices to rally in the year ahead, despite headwinds coming from US politics.
Copper prices outperform at start of this year. In the second half of last year, the LME three-month copper price fell back and underperformed its close peers, including aluminium and zinc. However, in the opening weeks of this year it has regained its mojo and started to rally strongly once more – up 5% year-to-date (data to 16 January). This is partly based on stronger demand in China, but the global economic backdrop also looks favourable, as Donald Trump starts his second term as US President.
Previous Trump Presidency saw rising equity prices and a weaker US$. The copper market has started to respond to the news that President Trump is set to impose additional tariffs on a range of industries. The current plans are vague, but could potentially include an additional 10% tariff on China, an additional 25% tariff on Canada and Mexico and a 10-20% tariff on foreign goods from other countries. Most economists believe that higher tariffs will boost US inflation, which will damage economic prospects. However, we highlighted in our recent research piece that the previous Trump Presidency was characterised by an upward trend in equity prices, stable inflation and a weaker US$. The piece can be found here: Therefore, if history repeats itself, the backdrop for copper seems likely to be bullish.
COMEX price rockets, as traders buy the rumour. While the direct impact of any new Trump tariffs on the copper market is also unclear at this point, it seems that shipping refined copper to the US could become more expensive and challenging in the months ahead and this has led to a massive surge in COMEX prices, relative to the LME, as we show in our chart. Comparing three-month COMEX prices with three-month LME prices, the US market saw an average premium of US$52/t over the past five years. This is because the US is a net importer of copper and should therefore trade above London, to encourage metal to flow into the country. However, the US premium surged to a record US$577/t by 15 January, which implies a 6.3% tariff on imports, based on today’s copper price.
Latin America is a vital US supplier. One reason while the markets are not pricing in even higher tariffs is that the US gets the majority of its refined copper imports from Chile (69% of the total in 2023) and Peru (10%), who could easily be exempted. While Canada and Mexico are also suppliers, they only account for 17% and 2%, respectively. There is also a historical precedent from the first Trump Presidency for the threat of tariffs to act as a negotiating tool in the hope of forcing concessions around issues like border security and trade policy. For this reason, tariffs could easily end up being lower than initially threatened. Realistically though the US remains a small (direct) consumer of copper, with 6% of the world total, relative to China at 58% and the current disconnect between COMEX and LME makes little difference to the global market balance.
China impacted by tariff threat through scrap supply. A more important global dynamic is that China is struggling to get enough scrap to feed its smelters, exacerbated by a lack of available concentrate. We show in our chart that copper scrap imports surged in in the first half of 2024, reaching 226kt in April. Since then, imports fell back to 173kt by November 2024. The driver again has been the threat of Trump tariffs. According to Fastmarkets, the US accounted for 20% of Chinese scrap imports in the first ten months of 2024. Traders have become nervous that shipments could be impacted by a US-China trade war and have been seeking other sources for raw materials. This has limited production growth in China.
Copper demand looks robust in China. One reason for the recent rally in copper prices is that underlying demand in China is strong and prospects for the year ahead appear to be improving. According to CRU, demand was unexpectedly robust in late December and early January (ahead of the upcoming Lunar holiday period), and utilisation rates at fabricating plants were elevated compared to recent historical trends. Part of this strength was being driven by a booming electric vehicle (EV) market, but consumer trade-in programs for home appliances also helped. Looking ahead, BNEF is forecasting that global EV sales will increase by 30% this year, with China a key part of this.
Furthermore, there are signs of improvement in the Chinese property/construction market – for example, the PMI for construction reached a seven-month high in December at 53.2, up from 49.7 in November – and housing sales are pulling out of their recent deep slump. Finally, a more explicit positive driver for copper in China will be spending by the State Grid, which is connecting diverse sources of green energy power, such as solar PV and wind. Infrastructure spending is set to increase to 650bn yuan this year, up from 600bn yuan last year. Given this backdrop, it was not surprising to see that Chinese imports of copper and copper products reached a three-year high in December at 559kt, up 22% y/y, despite decent growth in domestic smelter output. While the threat of Trump tariffs has clearly caused disruption to copper supply chains, China will continue to dominate the outlook for fundamentals. We expect it to remain a bullish driver for the global market in the year ahead, despite potential headwinds from US politics.