Copper: Tariff-driven arbitrage reshapes COMEX-LME spread – Societe Generale

Societe Generale analysts Michael Haigh and Jeremy Sellem assert that copper trading has transitioned into a policy-driven strategy due to Section 232 tariffs influencing the COMEX-LME spread. They point out an enlarged COMEX premium, renewed arbitrage possibilities, and a near-term mean-reverting spread with a slight long-term bias towards a $33/mt advantage.

Their model calculates market estimates for the likelihood of future US refined copper tariffs. Copper has evolved from a technical anomaly to a critical focus for traders and hedgers, primarily due to tariffs. Since 2025, the US has progressively enacted a stringent Section 232 framework around copper, imposing a 50% duty on semi-finished and derivative copper products, while deferring any tariff on refined cathode.

However, the decision regarding refined cathode tariffs hinges on a Commerce review, which may introduce duties of 15% in 2027 and 30% in 2028. This examination delves into the functioning of this arbitrage, the impact of the tariff overlay, and how policy risks manifest in copper pricing across physical and futures markets. As both contracts are physically deliverable, metal flows from the cheaper market to the pricier one.

Historically, the LME's extensive warehouse network has resulted in inventory levels about 65% higher than COMEX. The spread is treated as a mean-reverting series, with a modest bias towards a COMEX premium of approximately +$33/mt over the past 28 years. Dislocations typically decay rapidly (a half-life of about 3.5 days) and are bounded by a no-arbitrage band that accounts for freight, warranting, and financing costs, explaining the LME-to-COMEX trade.

Market-implied probabilities for future copper tariffs are derived by removing historical non-tariff elements from the premium of COMEX over fully delivered LME CIF costs, focusing instead on the expected tariff contribution. Calculations suggest a 14.6% chance of a 15% tariff by January 2027 and a 37% probability of a 30% tariff by January 2028.