Copper traders grapple with arbitrage activity

The rising price of copper on the Comex exchange in the U.S. is not being matched on exchanges in London or Shanghai, causing arbitrage activity that has recycled metal traders struggling to convince buyers to peg their purchases to the Comex price.

In a Feb. 11 report, Reuters says the price premium of Comex copper futures over those traded on the London Metal Exchange (LME) surged to a record of $920 per metric ton by the close of trading in Europe on Feb 10, up from an already wide spread of $558 per metric ton last Friday.

For money managers who use commodity markets as a speculation opportunity, the sizable spread has created an arbitrage opportunity. In the commodities exchange context, arbitrage can include a situation where traders take advantage of a regional price difference to buy material from the lower-priced market while at the same time selling material into the higher-priced market.

The Reuters report cites a note from the London-based Benchmark Minerals Intelligence that said, “The price arbitrage between the Comex and the LME ballooned to an all-time high [Monday] as traders continued to price in the implementation of copper import tariffs to the U.S.”

In Washington, the Trump administration has clarified its intention to place 25 percent tariffs on inbound steel and aluminum. As of now, no such announcement has been made regarding copper, but Trump reportedly has mentioned the red metal as another material that could see tariffs.

In a Feb. 7 note in The Copper Journal, New York-based analyst John Gross describes this month’s Comex copper premium over the cash LME as creating "a potentially dangerous situation.”

“We thought the 18-cent Comex premium on a monthly average basis last May was a one-off event, [but] back in 2006, when copper was facing severe volatility, Comex rose to a 13-cent premium over the LME, but just a few months later, the arbitrage swung back around to an LME premium," he says.

The Reuters report also references the May 2024 Comex versus LME price spread, saying, “The previous peak in the premium was in late May 2024, when it hit $655 a ton as Comex copper hit an all-time high of $5.1985 per pound due to a short squeeze.”

“U.S. companies buying copper based on Comex prices and selling into offshore markets at the LME price are facing severe financial issues," Gross says. "Further, companies that are hedging on Comex to protect inventory values, for example, have to come up with cash to cover margin calls against their short futures position.”

In the current landscape, overseas buyers of copper-bearing recycled metal generated in the U.S. are unlikely to accept a Comex pricing peg when they can buy materials pegged to the LME for several cents per pound less. That is problematic for scrap processing firms with industrial customers who, from their perspective, will insist on pricing pegged to the more robust Comex value when they sell their generated red metal scrap.