Strong dynamics drive the raw materials sector

Global financial markets remain in a state of high uncertainty as they respond to a steady stream of information about the Trump administration’s policies. Commodity markets have seen mixed price reactions to the prospect of U.S. import tariffs and potential retaliatory action from major trading partners, including Canada, Mexico and China.

The tariff threat is causing a disconnect in the valuation of futures contracts copper from global markets

• Copper futures (HG Copper) traded in New York rose more than 5% after Donald Trump suggested that imports of the metal – like aluminum and steel – could face a 25% tariff.

• The initial market reaction saw HG copper futures surge to around a 10% premium to London Metal Exchange (LME) prices, further decoupling US prices from international prices.

• While potential tariffs could permanently raise U.S. copper prices above global levels, the current rally may be premature – proceedings under Section 232 of the Trade Expansion Act typically take months.

• Current high price levels do not reflect supply and demand fundamentals, but Saxo analysts maintain a long-term bullish outlook for copper. The energy transition, driving demand for power and electrical cables, will support the growth trend in the coming years.

The Commodity Market and Donald Trump's Trade War

Oil price falls amid concerns that a global trade war could hurt economic growth and therefore fuel demand. Meanwhile, prices for a range of U.S. farm products, including corn, soybeans, wheat and cotton, have come under pressure after China, the largest buyer of those goods, imposed retaliatory tariffs on a range of U.S.-sourced farm goods.

In his 100-minute speech to Congress, Donald Trump defended his administration’s economic plans, announcing broad tax cuts and spending cuts. At the same time, he reiterated his intention to impose, in the name of national security, 25 percent tariffs on imports of aluminum, steel, and—crucially—copper.

HG copper futures in New York rose more than 5% following the announcement of a high tariff on the metal. If the move comes to fruition, it could further widen the price gap between New York and international benchmarks in London and Shanghai. The initial reaction sent HG copper futures surging to a 10% premium to London Metal Exchange (LME) prices before arbitrage activity prompted traders to take advantage of a broad and potentially premature rally.

Although the US President has already signed an executive order imposing 25 percent tariffs on imports aluminum material and steel since March 12, the copper market may be reacting prematurely. That's because Section 232 Trade Development Act proceedings typically take months to conclude. That means the actual impact on prices will lag behind what the market is currently pricing in.

But a 25% tariff was clearly not what the market was expecting, and traders are now frantically trying to factor in the right price level – whatever that may be. Regardless of the final decision on tariffs (or even their eventual removal), disruptions to global trade flows are already a fact of life. This is evident in the precious metals market, where the past few weeks have seen a massive movement of millions of ounces of silver and gold bars into U.S. vaults in order to avoid tariffs on imported metals used to hedge short positions in the futures market. COMEX.

In today's quotations we again see a widening of the spread between spot prices and futures contracts. silver, driven by a surge in copper prices in New York and uncertainty over whether silver will be hit by tariffs. Meanwhile, gold stabilised after a massive transfer of physical stocks sent COMEX-monitored reserves soaring to levels not seen since the disruptions to transatlantic flows during the COVID-19 pandemic in 2021.

Commodities on the volatility swing

The US copper market is likely to see increased volatility in the near term, until the tariffs are officially announced – some of which will also affect the London market. Global pressure to source copper that can be delivered to the US before the tariffs come into effect will support prices. The LME will see a drawdown in inventories, which is already reflected in the 3M spot spread.

After a long period of high supply, the spread remained wide contagion – which is a sign of a well-supplied market. However, for the first time in 18 months, the spread narrowed significantly and reached neutral (flat) levels.

Saxo analysts maintain a long-term bullish outlook for the copper market, driven by the energy transition, which will result in a sharp increase in demand for electricity – particularly in the electric vehicle (EV) sector, data centres and cooling systems due to rising global temperatures.

However, in the current situation, the observed price levels do not reflect supply and demand fundamentals, but only the short-term need to relocate metals to avoid tariffs. Paradoxically, this may slightly negatively impact global demand forecasts in the short term.

About the Author

Ole Hansen, head of department of commodity market strategy, Saxo Bank. Djoined a group Saxo Bank in 2008. Focuses on providing strategies and analyzes of global commodity markets identified by foundations, market sentiment and technical development. Hansen is the author of the weekly update of the situation on the goods market and also provides customers with opinions on trading goods under the #SaxoStrats brand. He regularly cooperates with both television and printed media, including CNBC, Bloomberg, Reuters, Wall Street Journal, Financial Times and Telegraph.