CITIC SEC: Tariff Disturbances May Propel Copper Prices Back to Peak Moments

CITIC Securities released a research report stating that the expected increase in US copper import tariffs has been escalating. COMEX copper prices and the spread compared to LME prices have reached a new high. The strengthening of tariff expectations may lead to a difficult resolution of short-term gaps in the US, and the sustainability and magnitude of COMEX trading are expected to be continuously validated. The imposition of additional tariffs by the US may have a limited impact on demand from China, but could instead restrict imports of refined copper and scrap copper to China. Combined with frequent policy signals, trading and fundamentals are accelerating resonance, and copper prices are expected to challenge previous highs. It is fully recommended to invest in the copper sector. The expected increase in US copper import tariffs is ongoing, with the sustainability and extent of this price difference being continuously validated. According to media reports, on March 5th, Trump reiterated his intention to impose a 25% tariff on copper imports. The tariff expectations have further evolved into concerns about domestic shortages in the US, with COMEX copper prices reaching new highs since May 2024, surpassing the LME premium beyond the levels seen in last year's squeeze situation. The sustainability and extent of this round of price differences have significantly increased since February. The US may find it difficult to resolve short-term gaps, and COMEX copper prices are expected to remain strong. Although the US only accounts for 3% of refined copper production, its apparent demand accounts for 7%, with refined copper annual imports ranging from 800,000 to 1 million tons, heavily reliant on imports. Calculations for the next 2-3 months suggest that even considering the potential of calling on LME inventories and limiting production from major copper-producing countries like Chile and Peru to 50%, the US copper supply gap may be difficult to alleviate, with estimates of gaps in March-May ranging from 154,000 tons to 67,000 tons and 11,000 tons, respectively. If you consider the increased stocking sentiment due to tariff concerns, the gap is expected to widen further. In addition, for traders engaging in cross-market arbitrage, the current price difference is still not enough to completely offset potential losses under tariff expectations, estimating that COMEX copper prices need to reach above $12,000 per ton to maintain balance. The compression of demand in China due to additional tariffs may be limited, and demand is expected to rebound under the warmth of policies. In terms of demand, CITIC Securities estimates that Chinas direct/indirect copper content exports to the US account for only 0.1% and 1% of global demand, with end demand largely concentrated on white goods and automobiles, which have been tested in the previous round of trade conflicts, as well as transformers where there is a disparity in manufacturing advantage between China and the US. Therefore, CITIC Securities believes that the impact of additional tariffs on demand in China may be limited. Historically, it usually takes 2-4 quarters for China's manufacturing PMI to rebound after the start of interest rate cuts. In the past half year, domestic policy signals have been frequent, and according to this deduction, around the second quarter of this year, there may be signs of demand recovery domestically, which will then boost copper demand. China's manufacturing industry returned to expansion in February beyond expectations, indicating a recovery in demand. Imports of refined copper and raw materials are being suppressed, and the domestic smelting maintenance season is kicking off. On the supply side, China also has a certain dependence on imports of refined copper and scrap copper, with imports in 2024 reaching 3.74 million tons and 2.25 million tons, accounting for 24.9% and 13.1% of China's consumption of refined copper and total copper consumption, respectively. The ongoing losses caused by the widening spread between COMEX and LME prices since February may lead to the closure of import windows, which could restrict the growth of domestic refined copper supply. Tightening of raw materials and continued negative spot TCs in the background have led to Chinese smelting plants entering a concentrated maintenance period since March, with maintenance in March-April this year expected to increase refined copper production by more than 50% year-on-year. The realization of supply reduction and frequent policy signals suggest an improvement in fundamentals that may boost domestic copper prices. Risk factors: Risk of a significant decline in copper prices; fluctuations in US tariff expectations and the resulting trading risks for copper prices; economic recovery in China and the US falling short of expectations; Federal Reserve's interest rate cuts being less than expected; risks of unexpected upstream supply growth; operational risks for enterprises' overseas assets.