U.S. Copper Tariffs: Potential Impact on Imports and Domestic Prices

The prospect of the U.S. imposing tariffs on copper is unlikely to significantly disrupt imports, but it could lead to a sustained premium in domestic copper prices, providing a boost to U.S. producers such as Freeport-McMoRan. This scenario is particularly relevant as the spread between Comex and London Metal Exchange (LME) copper futures has widened since the U.S. election. According to recent analysis, the Comex premium has averaged around 5% (20 cents per pound) since November 2024, expanding to 7% (30 cents per pound) in the spot market.

The Economic Rationale Behind Copper Tariffs

UBS has expressed skepticism about the economic rationale for copper tariffs. According to the bank, such tariffs would likely raise costs for U.S. consumers without stimulating significant investment in domestic mining or smelting infrastructure. However, one of the potential outcomes of the tariffs is the continuation of the Comex premium, which could provide a financial advantage to domestic producers of refined copper.

The U.S. Copper Market: Import Dynamics and Domestic Supply

The U.S. currently imports about 800,000 tonnes of refined copper annually, making up roughly 50% of domestic consumption. While domestic production has the potential to reduce reliance on these imports, the restart of the 200,000-tonne Hayden smelter and increased output at Rio Tinto’s Garfield smelter could only partially mitigate the country's import dependency. UBS notes that permitting challenges, rather than economics, are the primary constraints limiting the expansion of domestic copper supply, making it unlikely that tariffs would significantly drive new investment in U.S. mining operations.

Shifting Scrap Flows and Pressure on Refining Margins

While the U.S. is a net exporter of copper concentrate and scrap, it remains a key importer of refined copper and semi-fabricated products. Tariffs could alter the flow of scrap copper, potentially boosting domestic processing while limiting imports. This shift could place pressure on refining margins, as domestic refineries would likely face an increased demand for processing.

UBS's Outlook on the Copper Market

Despite near-term risks stemming from elevated speculative positioning in the copper market, UBS remains optimistic about the metal's fundamentals. The bank points to constrained mine supply growth and strong demand as key factors supporting copper's market outlook. In light of these fundamentals, UBS’s top copper stock picks include Antofagasta PLC (LON:ANTO), Anglo American PLC (LON:AAL), and Freeport-McMoran Copper & Gold Inc (NYSE:FCX).

In conclusion, while U.S. copper tariffs may not drastically affect imports, they could contribute to a persistent premium in domestic prices, offering advantages for U.S. producers. However, without a significant boost to domestic mining capacity, the overall impact of tariffs on the broader copper market may be limited.