In May 2024, due to ultra-low COMEX copper inventories, a historically rare short squeeze occurred in the COMEX copper market. A large influx of funds went long in COMEX copper futures, creating a squeeze on arbitrage funds and hedging enterprises already in the market. The intraday price spread between LME and COMEX copper once exceeded $1,000/mt, with the cross-market price spread widening to extreme levels. Traders began transporting copper to US warehouses to profit from the ultra-high price spread and alleviate the pressure from the short squeeze, leading to a gradual rebound in COMEX copper inventories. By January 9, 2025, the intraday premium of COMEX copper over LME copper exceeded $600/mt, nearing historical highs. Meanwhile, COMEX inventories were at historical highs, and the fundamentals could hardly support such a large price spread. What is the reason behind this?
The Washington Post reported on January 6, 2025, that aides to US President-elect Trump are exploring a tariff plan applicable to "all countries" for critical imported goods. This contradicts Trump's statements during his presidential campaign. Notably, on November 25, 2024, after his election victory, Trump stated that on his first day in office, he would impose an additional 10% tariff on all imports from China. Regarding the January 6, 2025, report by The Washington Post, Trump dismissed the news in a post, calling it "another fake news" and asserting that his tariff policy would not be scaled back.
Before Trump's inauguration on January 20, under the expectation of a "universal" tariff of 10% or 20%, or even higher, financial markets were filled with uncertainty about the potential impact of his trade policies. COMEX became the preferred choice for some speculative capital in US commodities, leading to a new round of surges in the price spread between the two markets. This may result in some copper traders engaging in cross-market arbitrage by buying LME copper futures contracts while selling COMEX futures, which would cause the price spread to narrow. It could also lead to a widening of the LME & SHFE copper price spread, an increase in domestic import losses, and even the opening of the export window.
According to SMM, some traders will lock in price spread profits by shipping copper from South America to North America. However, some traders are concerned about the potential extreme widening of the price spread between the two markets due to the fermenting expectations of new policies such as tariffs, which could lead to losses. In the Chinese market, the availability of deliverable copper sources for COMEX is relatively small. Considering factors such as transportation distance, time, and capital costs, the operational space is limited. As cross-market arbitrage positions enter the market, the price spread between the two markets is expected to gradually narrow. In the future, COMEX copper warehouse inventories may continue to grow, but based on US copper consumption expectations, this is not expected to exert pressure on its fundamentals.
