LME CME arbitrage continues to be broad on forward curve

The broad LME/CME arbitrage continues to be a talking point, even months after it collapsed as result of cathodes being precluded from US copper tariffs.

The reason the topic is still being broadly discussed is because, despite the arbitrage collapsing from its heights above $2500/t it is still relatively broad. This morning the arbitrage sat at over $300/t but has also been hitting close to $500/t repeatedly in recent weeks.

Recent changes in the arbitrage market

The arbitrage did narrow significantly, after cathode escaped tariffing, but it broadened notably after Freeport McMoRan announced a significant disruption at their Grasberg mine. Market sources noted that this was likely due to the CME market, which has a reputation for being more speculative due to US funds operating in it, pricing in more disruption than the LME.

At the time of the Freeport disruption, sources noted that the LME price didn’t push up as much because LME market participants were more sceptical about coming demand.

Factors affecting the long-term outlook

The broad long-term arbitrage is largely seen as due to the expectation that tariffs on copper cathode may be implemented in coming years. This is due to the fact that the US Section 232 statement outlined that a tariff may be added to copper cathode in the long run, starting at 15% in 2027 and then 30% in 2028.

Sources also noted that the US administration has made a number of surprise decisions on tariffs so far, for example the introduction and then doubling of tariffs on aluminium and steel. Sources said that there would be little certainty that the US wouldn’t tariff cathode anytime soon, and for as long as that uncertainty existed the arbitrage could continue to be broad.

How does the outlook for the CME and LME differ?

The CME is contango likely in part due to these tariff concerns, inversely the LME is in a notable backwardation in the long run, with the price at around USD 10,250/t by the end of 2028 against around USD 10,650/t in nearby months.

The LME price is being pressured by a series of factors. Firstly, the tariff speculation is pressuring the price because if this were to come into play demand for copper in the US would likely fall as they consumer already acquired stockpiles – thus reducing imports and pressuring global demand.

Beyond this, a number of copper participants are sceptical about where demand will be in the coming months and years due to concerns about broader economic questions.

“My view is demand is the issue – I think everyone got a but excited but fundamentally too much is uncertain. PMIs are still weak; data centre spend has not actually materialised yet,” said one market source.

Inversely sources noted that the CME market was being helped up by ‘fund’ or ‘tourist’ money which may be focusing on different price drivers than the LME.

“I also think the CME is being skewed by new fund money – they’re excited about gold so are looking for similar returns on other metals,” the market source added.

Another reason why the LME may be in backwardation is because recent supply disruptions have driven up copper prices. Three of the world’s ten largest mines have faced disruption in recent months, however, these disruptions will subside. Paired with longer-term demand worries and potential tariffs, returning supply maybe helping tip the LME in to a longer-term backwardation.

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