Will tariffs truly boost copper prices, or is this just another fleeting market reaction?
Yesterday's comment section featured an insightful exchange between two subscribers regarding a significant after-hours spike in copper futures across all contract months. This was likely triggered by President Trump signing an executive order directing the Department of Commerce to investigate potential copper tariffs.
The subscribers debated several key points:
· The current practice of mining copper in the US, sending it to China for refining, then importing it back
· How tariffs might affect US industrial customers who would pay more for refined copper
· The timeline challenges of building domestic refining capacity
· The surprising positive movement in FCX stock, despite my bearish outlook
· Questions about whether miners like FCX actually benefit from tariffs or might face reduced demand due to higher prices
The final question from the discussion was if I could weigh in. And I’m happy to deliver. I’m doing it here, so that this reaches every subscriber, not just those that go to Golden Meadow to read the comments (as you may see, it’s worth to do so as the discussions can be quite interesting), but also those that access my Gold Trading Alerts through e-mail. (And I also ended up sharing it with my free readers as well.)
Technically speaking, copper moved sharply higher and then it declined somewhat, which… Makes perfect sense. You’ll read “why” in the following paragraphs, but for now, please note that this upswing only made the current technical set-up even more similar to what we saw in the second half of 2024 when copper topped.
There was one distinct attempt to move above the 61.8% Fibonacci retracement level, which failed, and then there was the second, more measured attempt. What we see now is likely this “measured” attempt taking place right now. Since it’s news-related, it’s not as “measured” as it was back then, but overall, technically, the bearish topping pattern remains intact – especially that the move above the 61.8% Fibonacci retracement was once again invalidated.
Reality To Catch Up as Markets Are Forward-Looking
The immediate bullish reaction we're seeing in copper futures and mining stocks like FCX reflects how markets operate on expectations rather than current realities. This forward-looking mechanism often creates short-term price movements that may not align with longer-term fundamentals.
While tariffs might initially appear bullish for domestic copper producers, we need to consider the complete picture. The market's initial enthusiasm may soon be balanced by several countervailing factors:
- Potential Production Increases : US copper miners might respond to tariff protection by increasing production volumes, which could eventually lead to higher overall supply. As basic economics tells us, increased supply without matching demand growth ultimately pressures prices downward.
- Demand Elasticity : Higher copper prices due to tariffs could reduce demand from price-sensitive industries, potentially offsetting any benefits miners might receive from tariff protection.
- Global Market Adjustments : The global copper market will likely adjust to any US tariff implementation, potentially creating new trade flows that bypass or minimize the tariff impact.
- Historical Precedent : We've seen this play out numerous times with commodities where policy changes create temporary price spikes, but fundamental forces eventually reassert themselves.
Historical Examples of Similar Temporary Price Moves
We can look two historical examples where similar policy announcements caused only temporary price moves:
March 2018 Steel Tariffs:
· March 1, 2018: President Trump announced 25% tariffs on steel imports
· March 1, 2018: U.S. Steel (X) trades between $41.59 and $45.31 on that day (and it’s the yearly top)
· March 28, 2018: U.S. Steel closes at $31.90.
· December, 2018: U.S. Steel bottoms (intraday low) at $16.33 (erasing almost two thirds of its price from the yearly peak that formed on the day the tariffs were announced)
Aluminum During 2018 Tariffs:
· March 1, 2018: 10% aluminum tariffs announced
· Century Aluminum (CENX):
o March 1, 2018: Closed at $20.48
o March 13, 2018: Peaked at $22.94
· December, 2018: CENX bottoms (intraday low) at $6.54 (erasing OVER two thirds of its price from the March 1, 2018 close - the day the tariffs were announced)
So, will tariffs on copper really drive its prices higher? I don’t think so. Tariffs might actually serve as the final nail to copper’s coffin.
Real-Life Analogies for This Kind of Market Behavior
To better illustrate how this all works, I’ll provide you with a few analogies to real-life situations:
- The Stadium Wave : When fans in a stadium start a wave, it creates a visual spike that travels around the venue and then disappears. Similarly, market news creates a wave of buying or selling that moves through the market but eventually dissipates as reality sets in.
- Throwing a Stone in a Pond : News like tariff announcements is like throwing a stone into a pond. The immediate splash and ripples are dramatic, but they gradually fade as the water returns to its natural state. The bigger the stone (or news), the larger the initial splash, but even the largest disturbances eventually calm.
- Weather vs. Climate : Market reactions to the news are like weather events, while fundamentals are the climate. A sudden thunderstorm (tariff announcement) might temporarily change conditions, but it doesn't alter the underlying seasonal patterns (supply-demand fundamentals).
- Medicine Side Effects : The initial effect of tariffs on prices is like the immediate effect of medicine – often strong and noticeable. But just as the body adjusts to medication over time, markets adjust to policy changes, often neutralizing the initial impact.
The current situation with copper tariffs follows this predictable pattern we've seen repeatedly in commodity markets. The initial price reaction reflects uncertainty and potential disruption, but markets eventually price in reality rather than expectations.
It's worth noting that this situation mirrors what we often see in the gold market, where geopolitical developments can cause rapid price movements that typically fade within days as the market fully absorbs the implications and adjusts expectations accordingly.
The current situation warrants careful monitoring, but it doesn't fundamentally alter the technical picture that I've outlined in recent Alerts. The market may need several days to fully process these developments before returning to the path dictated by broader technical factors.
As always, patience with our current positioning is likely to be rewarded as the initial emotional reaction gives way to more rational market behavior.
Thank you for reading today’s free analysis. Today, the part dedicated to precious metals (and related markets) will be reserved for my Gold Trading Alert subscribers.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief