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US 'siphons' global copper inventories in squeeze driven by tariff expectations

Copper prices on the London Metal Exchange broke above US$14,700 per tonne intraday on September 8, setting a record high. Almost simultaneously, the most-active contract on the Shanghai Futures Exchange returned to the 110,000 yuan per tonne level, equivalent to about HK$120,000, while the most-active international copper contract rose by nearly 1.5%. From early July to September 8, gains across the major contracts exceeded 8%.

The rally is not being driven by a surge in physical demand, but by cross-market arbitrage led by Wall Street and fuelled by expectations of US tariffs. Traders have been sending large volumes of copper to COMEX, the New York Mercantile Exchange, for delivery, rapidly draining spot supplies in markets outside the US. Goldman Sachs' latest estimate shows that the copper supply deficit in non-US markets in 2026 has been sharply revised up to about 640,000 tonnes, from roughly 60,000 tonnes earlier this year.

As funds 'move' the world's most important industrial metal, what is left behind is not merely empty exchange warehouses, but an increasingly heavy cost burden for downstream manufacturers.

The 'pump' driving cross-market arbitrage

The key to understanding the surge in copper prices lies in the huge price gap between COMEX and London copper. The market is heavily betting that the US will impose tariffs on refined copper, and sophisticated investors have already spotted a loophole in the rules: if finished copper products become difficult to import once tariffs take effect, it makes sense to stockpile physical copper in COMEX delivery warehouses in advance. The strategy of buying on COMEX while selling or transferring LME copper is essentially a large-scale relocation of inventories.

The result has been an immediate squeeze. By early September, COMEX inventories had risen to about 690,000 to 700,000 tonnes, accounting for nearly 70% of the visible inventories held by the world's three major exchanges. At the same time, cancelled warrants at LME warehouses continued to flow in large volumes towards North America. With the pool of copper available for immediate delivery being drained, the premium structure was pushed higher. This explains why copper prices continued to rise despite a backdrop in which the macroeconomy was not particularly strong. In essence, a shortage of delivery liquidity created a temporary vacuum in pricing power.

It should be noted that arbitrage based on futures delivery rules is itself compliant. But it highlights a deeper problem: when pricing power for global commodities is overly concentrated in a handful of offshore exchanges, policy expectations in any one economy can be transmitted through financial channels into a global contest for resources.

A harsh winter for smelters amid negative treatment charges

If cross-market arbitrage has drained liquidity from the distribution chain, its knock-on effects are now putting pressure on supply. In China, the world's largest producer of refined copper, an invisible wave of production cuts is taking shape. The trigger is the precipitous decline in copper concentrate treatment charges, which have recently fallen into negative territory and are at their lowest level in nearly two decades.

For smelters that use copper concentrate as feedstock, negative treatment charges mean the cost of buying ore has exceeded the processing income from producing refined copper. Smelters are effectively producing at a loss. To limit losses, several major mainland smelters have been forced to reduce operating rates. This is not an isolated event: at the end of 2025, Chilean miner Antofagasta and mainland smelters agreed a 2026 annual term treatment charge at the historically rare level of zero. The deal suggests the supply squeeze is not a short-term phenomenon, but part of a structural imbalance in the industry that has persisted for more than a year.

Smelter cuts will not continue indefinitely. If copper prices remain high, losses caused by negative treatment charges will gradually be absorbed by the elevated metal price itself, and idled furnaces may be restarted. For now, the cuts are more a cyclical release of sentiment than a structural long-term trend.

The September 28 'sword of Damocles'

This bull market, driven by sentiment and liquidity, is approaching a sensitive date closely watched by the market: September 28.

To be precise, this is not a general 'deadline for a final US tariff decision', but a milestone with a clear legal basis. Under Section 232 of the US Trade Expansion Act of 1962, the Commerce Department must submit a report on its national security investigation into copper imports, after which the president has a 90-day window to sign an executive order. The main report submitted in 2025 recommended imposing a 15% tariff on refined copper from January 2027, rising to 30% in 2028. On June 30, 2026, the Commerce Department submitted an updated report that did not overturn the earlier conclusion, but added the latest data on COMEX inventories and import dependence. Ninety days from June 30 falls on September 28, which is the real reason the market is watching the date so closely.

Bulls have placed their bets on the grey area in which the policy has not been fully finalised, benefiting from the resulting term premium. But the other side of the coin is that risks are building rapidly. Once the tariff details are formally announced, the huge volumes of inventory accumulated in COMEX could flow back to the LME or other offshore markets if they cannot be converted into actual consumption in the US. The premium structure could then shift rapidly from extreme tightness to abundance, potentially triggering a significant short-term pullback in prices.

There is also uncertainty over whether production cuts at mainland smelters can continue into the fourth quarter. If copper prices remain high, demand for scrap copper as a substitute will rise quickly, while new overseas capacity could be brought on stream faster as losses narrow. Prices currently supported by policy fears and the withdrawal of liquidity will ultimately have to return to the fundamentals of genuine supply and demand.

Investors and industry participants should watch three indicators: first, the speed of cross-regional flows after cancelled LME warrants become available for collection; second, the fourth-quarter restart plans of major mainland smelters; and third, the specific exemptions and tariff rates in the September 28 tariff list. Until the policy is finalised, copper's roller-coaster ride is only entering its most turbulent bend.