Arbitrage Profits Vs. Tariff Risk

In recent days, we’ve seen the 𝗖𝗠𝗘/𝗟𝗠𝗘 𝗰𝗼𝗽𝗽𝗲𝗿 𝗮𝗿𝗯𝗶𝘁𝗿𝗮𝗴𝗲 𝗯𝗮𝗹𝗹𝗼𝗼𝗻 𝘁𝗼 𝗿𝗲𝗰𝗼𝗿𝗱 𝗵𝗶𝗴𝗵𝘀 as the expected timeline for U.S. tariffs on copper imports has been significantly tightened - from 9 months to a matter of weeks. While no specific rate is guaranteed, the risk has become very real for traders with metal already en route to the U.S. or allocated for future shipments.

At first, this arbitrage opportunity seemed like a gold mine. Traders who sold CME copper futures and bought LME copper futures at an 𝗮𝗿𝗯 𝗼𝗳 +$𝟭,𝟬𝟬𝟬/𝗺𝘁 𝗼𝗿 𝗲𝘃𝗲𝗻 +$𝟭,𝟱𝟬𝟬/𝗺𝘁 stood to make massive profits by delivering metal into a CME warehouse or directly to a U.S. consumer. Some estimates suggest 𝘂𝗽 𝘁𝗼 𝟱𝟬𝟬,𝟬𝟬𝟬 𝗠𝗧 𝗼𝗳 𝗰𝗼𝗽𝗽𝗲𝗿 is now headed to the U.S. to take advantage of this play.

But 𝘄𝗵𝗮𝘁 𝗵𝗮𝗽𝗽𝗲𝗻𝘀 𝗶𝗳 𝗮 𝟮𝟱% 𝘁𝗮𝗿𝗶𝗳𝗳 𝗶𝘀 𝗶𝗺𝗽𝗹𝗲𝗺𝗲𝗻𝘁𝗲𝗱? That would add an import duty of ~$2,500/mt—far outweighing even the most aggressive arbitrage levels. Suddenly, a trade that was making +$1,000/mt could be 𝗹𝗼𝘀𝗶𝗻𝗴 -$𝟭,𝟬𝟬𝟬/𝗺𝘁 instead.

𝗪𝗵𝗮𝘁 𝗔𝗿𝗲 𝘁𝗵𝗲 𝗢𝗽𝘁𝗶𝗼𝗻𝘀 𝗳𝗼𝗿 𝗧𝗿𝗮𝗱𝗲𝗿𝘀?

1️⃣ 𝗥𝗲𝗱𝗶𝗿𝗲𝗰𝘁 𝗦𝗵𝗶𝗽𝗺𝗲𝗻𝘁𝘀: Even metal already on the water can be rerouted to other locations—though at a cost.
2️⃣ 𝗨𝗻𝘄𝗶𝗻𝗱 𝘁𝗵𝗲 𝗔𝗿𝗯𝗶𝘁𝗿𝗮𝗴𝗲: Traders could deliver copper against an LME-priced short instead. While this means closing out their arbitrage trades, it might be less costly than paying the tariff.
3️⃣ 𝗧𝗮𝗸𝗲 𝘁𝗵𝗲 𝗿𝗶𝘀𝗸 𝗼𝗻 𝘁𝗮𝗿𝗿𝗶𝗳𝘀: Continue sending copper to the US and hope that tariffs are either not implemented, there are exceptions or quotas (like the section 232 on Aluminum), or that the cost of any import tariff remains below the level of arb they booked at.

𝗪𝗵𝗮𝘁 𝗔𝗯𝗼𝘂𝘁 𝗖𝗼𝗽𝗽𝗲𝗿 𝗣𝗿𝗲𝗺𝗶𝘂𝗺𝘀?

The 𝗨.𝗦. 𝗰𝗼𝗽𝗽𝗲𝗿 𝗽𝗿𝗲𝗺𝗶𝘂𝗺 has collapsed as traders rush to sell physical metal to capture the arbitrage profits—who cares about the premium when the arbitrage is paying $1,000/mt? Meanwhile, premiums in 𝗥𝗲𝘀𝘁 𝗼𝗳 𝗪𝗼𝗿𝗹𝗱 (𝗥𝗢𝗪) 𝗺𝗮𝗿𝗸𝗲𝘁𝘀 𝗵𝗮𝘃𝗲 𝘀𝘂𝗿𝗴𝗲𝗱 as traders scramble to source material.

🔹 If tariffs hit, expect a reversal:
✅ U.S. premiums will spike as domestic producers adjust prices to reflect higher import costs.
❌ ROW premiums will fall as excess copper floods the market.