Metal Movers Podcast: The Copper Crunch

Ronan: The transformation of copper trade flows has been one of the biggest stories in metals this year. The red metal has been dubbed Dr. Copper for years because of its widespread use in a range of major industries, which means it acts as a strong barometer of global economic activity. It's able to function as this barometer because it's a stable market relative to most of the other high-volume metals. Despite the greater diversity of mine supply, a range of uses and steady requirements across all large global economies all mean that it's pretty secure against supply or demand shocks.

That changed with the re-election of Donald Trump as U.S. President. In February, Trump ordered a Section 232 investigation that could potentially result in the U.S. imposing tariffs on imports of refined copper into the U.S., similar to the 25% tariffs on steel and aluminum imports that were lifted to 50% in June this year. The investigation triggered a surge in shipments of copper cathode to the U.S. in order to customs-clear metal before any tariffs could be implemented.

Overall U.S. imports doubled on the year through to April to around 460,000 tons, of which just over 200,000 tons arrived in April alone. This drove a spike in copper prices on the U.S.-focused COMEX exchange, which drove up a huge arbitrage between COMEX and both the London Metal Exchange and Shanghai Future Exchange copper prices. The COMEX-LME arbitrage hit a record high of $1,862 per ton on the 26th March. That arbitrage accelerated the flow of copper into the U.S. as sellers raced to take advantage. It's fallen back since but is still at an extremely high level, more than enough for sellers to keep prioritizing sales into the U.S. over other global markets.

Consequently, stocks of copper able to be delivered into the COMEX warehouse system have been sucked away from the LME and SHFE and left buyers in China, Europe, and the rest of Asia scrambling to secure units. Regional premiums are rising sharply. All of a sudden, Dr. Copper is trying to behave more like the rest of the base metals, volatile, unpredictable. But can this state of affairs persist? What is the U.S. actually going to do with all this copper? And is it going to stay there for the long term? How are China and Europe replacing their lost copper units? And what's the outlook for the rest of the year?

For more insight into this complex issue, I spoke to Argus Metals copper experts in the U.S., China, and Europe. I'm Ronan Murphy, editor of Argus Non-Ferrous Markets, and this is the "Metal Movers" podcast.

For a more detailed and in-depth look at how the U.S. physical market is actually reacting to this influx of metal, we turn now to a quick discussion with Mike Hlafka, who is associate editor for Argus covering the copper markets in the U.S. and an industry veteran with 27 years at Olin Brass, now known as Wieland Rolling Mills in East Alton, Illinois. So, Mike, we've seen all this copper come into the U.S. Has there been any actual increase in U.S. refined copper consumption or spot purchases by end users this year?

Mike: Yeah, thanks for the question, Ronan. It's really difficult to say, but I believe there's not that much of an increase in consumption. If any at all, business levels are relatively flat, and the refined growth is below expectations due to delays in starting up several new U.S. mills that are supposed to be coming online now, I hear, maybe late or early next year. But there has been maybe a bit more buying than actual physical demand. Because of the current lower premiums, consumers are buying cheap to use later.

Ronan: So, do you think the inventory buildup...the buildup of stocks in COMEX and outside COMEX warehouses, can that be sustained?

Mike: Well, I just checked this morning, and COMEX stockpiles have grown 66 consecutive days, and that's at a 7-year high at over 180,000 metric tons. And all COMEX-eligible brands should continue to come to the U.S. until the looming 232 copper tariff is announced, if it is. But everything not nailed down is already here. It's just fresh production coming out of the ground that needs a home now. However, flows of non-registered units seem to be slowing greatly. That material cannot go to the exchange and thus needs a physical sale to close out the arbitrage. And the U.S. spot market is not large enough to absorb those volumes.

And additionally, consumers have become more knowledgeable about the arbitrage and push for wider discounts on non-registered units that they know have no other homes, reducing the attractiveness for those imports. But the lack of tariffs would bring the arbitrage between COMEX and LME back to traditional levels, and the U.S. imports would slow then.

Ronan: So, how far do you think does the COMEX-LME arbitrage have to fall to halt the flow of copper into the U.S.?

Mike: The arbitrage would have to fall below the CIF, which is the cost, insurance, freight, China premium to halt the flow of registered copper to the U.S. Or if the COMEX-London Metal Exchange arbitrage gets to 10 cents per pound or less, I believe the inflows would dry up.

Ronan: Interesting. So, regardless of whether the flows do dry up, we now have this huge inventory that has been built up in the U.S. What is going to happen to that? Is it going to function as some kind of a long-term tariff-free stockpile for U.S. consumers if 232 tariffs are imposed?

Mike: Yeah, that's exactly right. I think it would be exactly that and function that way. It'd be used as a long-term stockpile.

Ronan: And that kind of metal, would it flow back into global markets and LME or Shanghai warehouses if the arbitrage flips?

Mike: Once that metal is in the exchange, the price advantage disappears. It can only be purchased on a COMEX basis, and the exchange warehouse costs are very high. The FCA or free carrier exchange warehouse material usually incurs about a 4-cent-per-pound baseline charge. And those locations are usually unfavorable to most consumers, meaning there'll be an extra freight cost to ship that back out. So I anticipate that copper cathodes will remain in the U.S. unless there's no copper tariff and there's an extreme flip between the LME and CME price.

And talking to participants, they think the arbitrage won't flip once a duty is imposed, and that duty or tariff may still be smaller than the ARM, which would keep that metal flowing into the U.S.

Ronan: That's an interesting kind of outlook, long term, then. And for how things are working kind of in the internal U.S. market, how has the influx of metal impacted premiums for copper delivered to U.S. customers from U.S. warehouses?

Mike: The wide arbitrage from tariff concerns is why copper cathodes have moved to the U.S., and all that extra material with tepid demand has weighed on the U.S. premiums, keeping them in the mid to high single digits. The non-registered copper cathodes are currently going for right around flat COMEX to mid-single digits, but the quality of that material is always in question. But with all that said, uncertainty, volatility remain for copper with geopolitical instability, trade tensions, U.S. Fed rate decisions, military conflicts, the direction of the dollar, and the global economy will all play a part in where that price goes.

Ronan: Well, thank you very much for your time, Mike. Very much appreciate your insight. Yeah. And I think, as we can see, the U.S. copper market really has been transformed by the events of this year and is going to continue to be a real kind of interesting market looking forward. So thank you very much.

Mike: Thank you, Ronan.

Ronan: So now, for a perspective on how the current shift in trade flows is affecting the Chinese copper market, we turn to our Shanghai analyst, Ting Ao. Ting, thank you very much for joining us today. So the first question is, how has the flow of refined copper into the U.S. affected the Chinese copper market?

Ting: Yeah. The Chinese copper cathode imports sell by 4.1% from one year earlier to 1.55 million tons in January to May, mainly because more Chilean copper cathodes were delivered to U.S. Cathode imports from Chile, down by 50% on a year to 166,000 tons over the same period. And Chilean copper imports accounted for 10.7% of total China's imports in January to May, down from a proportion of 14.3% in 2024.

Ronan: And how are Chinese consumers going to replace those copper flows that have gone to the U.S.?

Ting: China imported more copper cathodes from the Democratic Republic of Congo and Russia as replacements, as those cathodes cannot be traded in COMEX. The DRC copper cathodes are mainly equivalent quality grade A copper cathodes, which cannot be registered in exchange, but the quality is equal to grade A copper cathodes. China's copper cathode imports from the DRC and Russia rose by 2% and 116% from one year earlier to 558,000 tons and 194,000 tons in January to May. The DRC copper imports accounted for 36% of total imports in January to May, flat from 2024. And the Russian copper imports accounted for 12.5% in January to May, up from 6% in 2024.

Ronan: And with refined material so tight and having to bring in material from other destinations, how have refined copper premiums in China reacted?

Ting: Chinese premiums for copper cathode imports rose from $50 to $70 per ton SHFE Shanghai on the 2nd of January to $100 and $120 per ton on the 24th of April and stayed at this level for one month because of trade flow shifting. Premiums for Chilean copper reached $200 per ton because of less supply to China, with premiums for Japanese, South Korean, and Australian copper traded at $105 to $120 per ton.

Ronan: And at the same time, as we've seen this kind of increase in copper cathode premiums in China and shift in trade flows, we've seen continued collapse of treatment and refining charges in China for copper concentrate down even further and further into negative territory. Has this been accelerated at all by the trade flow shift, or is this still fundamentally being driven by the same issue as was the case previously by expansion of Chinese smelter capacity outpacing global mine capacity?

Ting: The collapse in treatment and refining charges in China is still driven by the expansion of Chinese smelter capacity outpacing global mine capacity. The trade flow of copper concentrate did not change like copper cathodes. Around 2.8 million tons per year of smelting capacity is expected to come online globally this year, but mining capacity is forecast to grow by only 1.5 million tons per year in the same period according to our estimates. Global copper mine production is expected to increase by 2.3% from one year earlier to 23.5 million tons this year, but China's refined copper output rose by 8% from one year earlier to over 6 million tons in January to May, according to the data from the National Bureau of Statistics.

Some copper smelters overseas have halted production because of tight concentrate supply, including PASAR, 200,000-ton-per-year smelter, Tsumeb, 240,000-ton-per-year, and Mount Isa smelter probably will halt production in 2026 with a capacity of 300,000-ton-per-year. But there are no signs that large copper smelters in China will cut output because of higher prices of byproducts such as gold, silver, and sulfuric acid in the first half of the year.

Ronan: That's very interesting. So looking through the rest of this year, what is the outlook for the copper market in China?

Ting: Refined copper output is still expected to grow rapidly with Tongling-launched 500,000-ton-per-year copper smelter in late March. Tongling also plans to launch another 300,000-ton-per-year smelter in October. But copper cathode import is still expected to keep falling on the year in the second half because trading houses will keep sending cathodes to U.S. before the Section 232 investigation due in late November. And China's growth in copper demand is likely to decelerate in the second half of this year given slowing capacity installation in the solar power industry and a strong basis last year. China's newly installed solar power capacity rose to nearly 105 gigawatts in January to April, up by 75% from one year earlier. But the capacity installation is expected to slow down in the second half of the year because of two industry policies carried out in May and June, which will cancel state subsidies to those photovoltaic projects.

China's copper demand increased quickly in the second half of last year driven by a steep fall in metal prices. But it will be difficult for copper demand in the second half of this year to grow further compared with last year because copper fabricators restock sizable metal feedstock in April after the LME 3-month prices dropped rapidly from over $10,000 per ton on the 25th of March to a 14-month low of $8,100 per ton on the 7th of April.

Ronan: And looking at one of the kind of oddities is that certainly the LME price hasn't really risen sharply. It was only above $10,000 per ton for a very short time this year despite the tightening of global supplies. Is that going to change in the second half of the year if both Shanghai and LME prices are going to have to rise in order to divert units away from the U.S.?

Ting: Market participants expect copper will continue to flow into the U.S. until the outcome of the Section 232 investigation is announced. COMEX cash copper was $1,053 per ton higher than LME cash official on the 27th of June because the market expected a 42% possibility that the U.S. would impose a 25% tariff on copper imports. And market participants are expecting the copper cathodes going to the U.S. may not be diverted to China because Chinese premiums for copper cathode imports cannot cover shipping costs of $300 per ton. But SHFE and LME prices are indeed in an upward trend because U.S. potential tariffs have led to a surplus in U.S. markets and a tightness in non-U.S. markets.

COMEX copper stocks doubled to nearly 208,000 short tons during the second quarter, but LME copper stocks down by 41% in the past month to 91,275 tons on the 27th of June. As over 95% of LME's open warrant copper stocks are Chinese and Russian copper in late May, so the decrease of LME copper stocks from May to June possibly will come to China. The price spread between LME cash and LME 3-month prices also rose to $392.5 per ton on the 23rd of June from only $10 per ton on the 1st of May, which means copper supply in LME's system is very tight now.

Ronan: Excellent. Well, thank you very much, Ting Ao, for your time and for your insight into the Chinese copper market. Thank you.

Ting: Thank you.

Ronan: We'll look at the impact of the shift in trade flows on the European copper market. We go now to our reporter in London, Roxana Lazar, who covers copper primary and secondary pricing for Argus Metals. Roxana, hello.

Roxana: Hi, Ronan. Thank you for the introduction.

Ronan: So, how has the flow of refined copper into the U.S. affected the European market? What material is now less available for European consumers, and how are they looking to replace it?

Roxana: Yeah. So, as exporters rushed to get their cathodes into COMEX, Europe was left behind. So it created a market-wide supply shock. So this is specifically for refined copper cathode, we saw limits in the market. So on-warrant stocks, LME-registered warehouses plunged by nearly 80% from the beginning of the year, reaching some of the lowest levels since mid-2023. As of 30th of June, LME on-warrant stocks in Europe totaled just over 31,000 tons, which marks a 41% decline from the start of the year. So this wasn't just a trickle of material, but it was a major reallocation of physical copper. This obviously severely impacted the availability in the European market.

So, according to some customs data, there was a 13% decline of imports to EU countries in February and 10% decline in March, as compared to only a 2% decline in January before the investigation started. So the decline includes lower exports from traditional main-state Chile, as well as lower shipments from EU suppliers like Bulgaria, Germany, Belgium. So, yeah, as other Chilean and other COMEX-approved producers shipped their refined copper to the U.S., Europe is being forced to source from other non-traditional suppliers, such as the DRC, which saw a 90% rise in exports into Europe in the first quarter.

Ronan: Fascinating. So we know that China has been looking at material from the Democratic Republic of Congo, but that's going into Europe as well. And how have European copper premiums reacted?

Roxana: So, well, with the spot cathode being in short supply, those premiums have obviously surged. So, as of mid-June, the premium for delivered copper cathode into Germany was assessed at $270 to $290 per ton, which marks a 56% increase since mid-March. Also, this is the highest level since Argus began assessing this market. This is a similar situation for delivered Southern Europe and cif Rotterdam as well. We're seeing higher premiums. And also, it's worth noting that this spike in premiums is not being driven by demand growth. In fact, the demand across Europe remains relatively tepid, especially from industrial consumers still dealing with sluggish economic conditions. So this is a classic case of supply-driven price inflation really.

Ronan: And presumably, when there's not a lot of refined copper, a lot of cathode around, does this mean people are trying to replace that with scrap? And what, in fact, is that having on scrap prices?

Roxana: Yeah, that's exactly what's happening. So, with cathode supplies running thin, the market has naturally turned to substitutes, specifically high-grade copper scrap. The most notable among them is millberry, which is also known as bare bright scrap, which is an ideal alternative to refined copper. So in the past few weeks, we've actually seen millberry prices in Europe reach nearly the same level as the LME cash price. And scrap typically trades at a discount to reflect its secondary nature and also the extra work needed to process it. But now millberry is effectively being treated like cathode. And this is also a similar situation. A similar situation is happening with other grades like Berry/Candy and Birch/Cliff, which are also seeing lower discounts. So the scarcity has led to a few inactive buyers, some of whom haven't even asked for scrap in several years. They're coming back into the market now trying to source this alternative material.

Ronan: Fascinating. And looking forward through the rest of this year, what's the outlook for the European copper market? Do we expect the tightness to persist? Are premiums and scrap prices set to remain elevated?

Roxana: Well, I would say that until there is clarity on whether tariffs will be imposed and, if so, at what level, exporters have every incentive to continue prioritizing the U.S. market. So U.S. bank, Goldman Sachs, predicts that the investigation will result in 25% tariffs on U.S. copper imports by September. So we'll see what happens then. But until then, we're likely looking at sustained higher premiums, continued strength in scrap markets as well, and I would say a very difficult environment for European copper buyers.

Ronan: Excellent. Well, Roxana, thank you very much.

Roxana: Thank you, Ronan.

Ronan: It's clear that full clarity on copper market direction is dependent on the outcome of the U.S. 232 investigation, but it looks very likely that trade flows towards the U.S. will be maintained until that exchange arbitrage narrows significantly. For the time being, regional premiums and scrap pricing will maintain an elevated prominence and are likely rising more sharply in China and Europe if there's any uptick in end-user demand at all. That concludes the podcast. For more information on our prices and all the rest of our news and analysis coverage, please visit www.argusmedia.com.