Trump's 50% copper tariff includes a major exemption. That won't halt price rises

CNBC

3 days ago

A major exemption to President Donald Trump's 50% copper tariff has shocked traders and sent U.S. market prices plummeting.
The final order on copper tariffs, which the Trump administration says will boost the domestic copper production industry, applies to semi-finished products such as pipes, rods, sheets and wires. It also impacts copper-intensive items like cables and electrical components. But crucially, it does not include the raw input material copper cathode, copper ores, concentrates or scraps, as had been widely expected.
However, analysts say that may not be enough to avoid prices for a range of consumer goods containing the metal, from cookware to air conditioning units, being pushed higher as a result of the changes.
U.S. copper prices on the Chicago Mercantile Exchange (CME) shot to a record high earlier this month, also hitting an all-time premium over the global benchmark London Metal Exchange (LME), following the initial July announcement of a 50% tariff. While importers had already sent refined copper flooding stateside at record levels through the first half of the year in anticipation of new duties, the scale of a blanket 50% rate jolted markets and put severe upward pressure on U.S. prices.
The eventual reveal on Wednesday of a tariff targeting only semi-finished products has provided yet another massive shock. In the minutes after the news, COMEX copper (metals futures contracts on the CME) fell 19% in the biggest intraday fall on record, according to bank ING.
The gap between COMEX above LME prices has been around 30% since the initial July 8 announcement, implying continued uncertainty that the overall tariff rate would end up at 50%.
However, traders were instead considering possible exemptions for countries such as major exporter Chile, or for delays to full implementation of tariffs, Albert Mackenzie, copper analyst at Benchmark Mineral Intelligence, told CNBC.
The actual situation is almost a 180-degree pivot from what was expected and what was being priced in to the CME, which was tariffs on refined copper, Mackenzie continued.
The deviation sent the CME price premium plummeting from around $2,637 at the start of Wednesday to just $90 on Thursday morning in Europe, Mackenzie said — a scale of a drop that would look like a mistake were it not for the tariff context, he added.
While traders were taking advantage of a price arbitrage, part of the reason for the huge redirection of copper supply into the U.S. has been that it would take decades for the country to be able to sufficiently increase domestic production of the metal to meet demand. The U.S. currently imports around half its copper, with major exporters including Chile, Canada, Peru and Mexico.
Analysts at Deutsche Bank stressed the "huge shock to the market" this week, noting Thursday that shares of Arizona-based miner Freeport-McMoRan — the copper company most exposed to tariffs on refined copper driving up U.S. prices — closed over 9% lower the previous day.
"Fundamentally, this does not change the copper supply-demand balance (and arguably improves it due to less demand destruction risk), but is likely to put COMEX under heavy pressure," they wrote.
Downward price pressure is likely to follow through onto the LME on a less dramatic scale, they said, in the wake of the massive build-up in refined inventories in the U.S. so far this year. The overhang "could see high shipments from the U.S. back into the global market," they said, where supply has become tight.
Duncan Wanblad, CEO of mining giant Anglo American – which has major copper operations around the world – told CNBC's "Squawk Box Europe" on Thursday that while there was currently a "material dislocation" in the placement of inventories, the demand fundamentals for copper "look great."
"Through a medium- to long- term lens, the fundamentals of copper are really underpinned by the fact that demand is looking to be very strong still in terms of the world's need for an energy transition, for the likes of battery-electric vehicles, for the likes of new energy supply, data centers, AI," he said. Supply on that longer-term outlook remains constrained, he added, amid difficulties obtaining permits and getting product into market.
One policy revealed Wednesday is that the copper tariffs will not stack on top of Trump's new duties on automobile imports, meaning only the latter rate would apply to an impacted product.
However, Benchmark Mineral Intelligence's Mackenzie pointed out that a lower U.S. market price premium does not mean no feed-through into prices for consumer products.
"If you're a manufacturer of fridges or air conditioning units, or even houses, you don't buy copper cathode. You buy wiring and other semi-finished copper products, which are the things being tariffed. So it's reasonable to assume the price increase will be reflected in some end goods," Mackenzie said.
Russ Bukowski, president of manufacturing solutions firm Mastercam, agreed.
"Although there are currently high inventories of copper in the country, the 50% increase on copper tariffs is going to hurt manufacturers in the long run and lead to higher production costs," Bukowski told CNBC.
"To stay afloat, manufacturers may have to pass these costs to consumers, which will likely drive-up prices on various goods."
Michael Reid, senior U.S. economist at RBC Capital Markets, said the impact on consumer prices would be "nuanced" as it appears via an input to other goods.
"The largest sectors that use copper as inputs include motor vehicles, plumbing fixtures and valve fittings, communications wire (i.e., cable and internet providers), and various electrical components. To that end, the manner by which those products are made matters – which is to say, if a car is imported, its copper content won't be tariffed," Reid said by email.
"Where we would expect to see it impact consumer prices the most would be in the housing/construction sector where copper inputs play a big role for electric wiring and plumbing."
"But in the context of the overall cost of a house, the impact is not as harsh as the 50% may sound – assuming the typical cost of plumbing and electric components is $10k then an aggressive full passthrough to the end consumer would mean costs rise to $15k. In the overall cost of a home, that $5k increase would be around 10%," he added.