Copper: Event-driven Trade Idea on Recent TariffsCOMEX: Micro Copper Futures ( COMEX_MINI:MHG1! ), #microfutures
The Event
On July 9th, President Trump announced that he would impose a 50% tariff on imports of copper, effective August 1st.
The decision was based on national security assessment. Copper is the second most used material by the U.S. Department of Defense. The President intents to use tariffs to reduce reliance on imports and shore up support for domestic production.
Immediate Market Reaction
U.S. copper prices ended Tuesday’s session over 13% higher — the sharpest single-day gain since 1989. The September COMEX copper futures contract was settled at $5.584 a pound on Friday, up 35.7% year-to-date.
Due to tariffs, Copper in the U.S. is priced at a large premium over international markets.
• UK: LME copper contract was quoted at $9,660.5 per ton on Friday.
• China: SHFE coper futures was settled at RMB 78,420 per ton. It can be converted to $10,959.4 via the Dollar/RMB exchange rate of 7.1555.
• US: COMEX copper quote of $5.584 can be converted to $12,312.7 per ton.
• As of Friday, COMEX copper is priced at a 27.5% premium over LME copper, and a 12.3% premium over SHFE copper.
The U.S. Copper Market
The U.S. Geological Survey reports that the 2024 total refined copper consumption was 1.8 million metric tons. Of which, 850,000 tons were from mining, 150,000 tons were refined from scrap, and 810,000 tons from imports.
Chile is the biggest source of U.S. copper imports, accounting for 581,000 tons, or 71.7% of total imports. Canada is the second largest, for 169,000 tons, or 20.9%.
Copper is a widely used base metal, found in products ranging from machinery, electronics, household goods, housing, infrastructure projects, to aircraft and missiles.
Since President Trump announced a probe into copper in February, traders have been poised for a hike on copper duties, leading to major shifts in inventories away from Europe and Asia and into the U.S.
The Next Event: Will the Copper Tariffs get postponed or reduced?
The goal to increase domestic production of copper is very challenging. It will take years to ramp up and decades to fully meet demand — at a massive upfront investment cost.
Hiking the import duties would not help national security. It could not change the fact that the biggest copper mines are in Chile, Peru and Canada. A sharp increase in the cost of copper will quickly translate into wide-ranging inflation in the U.S.
In my opinion, once the Trump administration realizes the full impacts, we could possibly see a crawl-back from the intended copper tariffs. The effective date would be postponed, the tariff rate could be reduced, and many companies may get exemption/waiver. We have seen similar maneuvers happening multiple times in the past few months.
Overall, the actual impact of copper tariffs will be much smaller than the original announcement.
Shorting COMEX Copper Futures
Historically, the price difference between COMEX and LME coppers has been near-zero and was around the $150 level in 2024.
Since February, COMEX copper has been trading at $500-$1,500 premium over LME. As of Friday, COMEX copper futures have gone up 35% this year and are now priced at $2,652 per ton above LME copper.
In my opinion, these price differences reflect no economic fundamentals. It is purely due to the ever-changing global tariff conflict. If President Trump rescinds his tariff narratives, we could likely see a large drop in COMEX copper prices.
A trader sharing this view could explore shorting the COMEX Micro copper ( GETTEX:MHG ).
Last Friday, the September micro copper futures contract (MHGU5) was settled at 5.5910. Each contract has a notional value of 2,500 pounds of high-grade copper, or a market value of $13,977.5. To buy or sell 1 contract, a trader is required to post an initial margin of $1,100. The margining requirement reflects a built-in leverage of 12.7-to-1.
Let’s use a hypothetical trade to illustrate how to use a short futures position to take advantage a potential reduction on copper tariffs.
Hypothetical Trade:
• Short 1 MHGU5 contract at 5.5910, and set a stop loss at 6.00
• Trader pays $1,100 for initial margin
Scenario 1: Tariffs go into effect, copper rises to $6.57
• Futures reflect a 50% premium over current LME copper price, which is at $4.38 per pound
• Short order stop loss at 6.00, and the maximum loss is $1,022.5 (= (6-5.591) x 2500)
• The trader loses most of the margining fund, but owes no more
Scenario 2: Trump Rescinds Tariffs, Copper falls to $4.38
• COMEX copper will be priced at No premium over LME
• Short position gains: $3,027.5 (= (5.591-4.38) x 2500)
• The hypothetical return will be 275.2% (= 3027.5 / 1100)
The above scenarios show that
• When copper falls, short position will have higher returns due to its leverage nature.
• When copper rises, the stoploss will kick in to set maximum losses.
The above trade idea could be deployed using the standard-size Copper Futures contract. Its notional value is 25,000 tons, which is 10 times bigger than that of the micro contract. The initial margin is $11,000. The standard-size contract is more liquid. On Friday, it had a total volume of 60,313 contracts, and an open interest of 221,682.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.sweetlogin.com
