Silence on Section 232: Reading Between the Lines

Hello and welcome to Copper Weekly, a benchmark podcast. I'm Michael Finch, head of strategic initiatives and we've been we have Albert McKenzie, Copper Analyst and Marker Reporter, where each week will unpack what really move the copper market and what to watch in the coming days ahead. Along the way we'll be joined by number of guest speakers, so kick back, relax and enjoy this quick download on everything copper. Hello and welcome back to Copper Weekly, a benchmark podcast. Thanks for joining us for what is now episode number five and thanks to everyone that tuned in last week and if you are enjoying the show please don't forget to follow and rate the podcast. Albert, welcome, how you doing? I'm doing well thanks, I'm doing well, how about yourself? Yeah, yeah, doing okay, doing okay, a little disappointed we didn't hear any news regarding the the US import tariff situations. I think let's just cut straight to the chase. We actually delayed the recording of this podcast to what is now Wednesday, the 1st of July, just to try and capture and allow time for that announcement to die, Jesse information to hopefully shed some light for our listeners on exactly what is happening and what the impacts might be regarding US import tariff, but we heard absolutely nothing yesterday, either overnight or yesterday evening. So Albert, straight off the bat, what is going on in your opinion? I think it's fair to say the whole market was was waiting on this announcement, a lot of press, a lot of, I don't think maybe excitement is the right word but anticipation, but we heard nothing. Why? Yeah, I mean there was a lot of, I mean if you've followed any of our coverage, you'll see that we covered it a lot, but also the big news organisations were also covering it quite a lot and there was definitely an expectation that we would could hear something yesterday. I would say for the last sort of month or so, I'd sort of wondered whether we might just get to the day and nothing happened and we had actually, that seems to be one of the sort of outcomes that lots of people expected. So it's not quite as completely by surprise that nothing has happened. I think we put it as sort of internally in my head, it was like a sort of 15 or 20% chance that he just said nothing and that is what's happened. I guess one thing I would say is reading, I have now reread the, you know, you know, I was speaking about this, I've now reread the the announcement from last year and it doesn't necessarily explicitly say that June 30th would see a public announcement more that there would be, you know, the conclusion of internal sort of governmental discussions in the US. So maybe that's a sort of misunderstanding, we as a market have taken. But I do think everyone, yeah, I think I think people thought yesterday was something important and it turned out not to be. No, time went and passed and nothing like. So maybe it's a technicality, maybe we misread the situation is a collective. Is it, is it, is it essential that we, it could be the case we hear something just in the coming days or next week? Like I said, if the June 30th deadline was purely about the recommendation being passed on to President Trump, could it just be the case that it makes its way into the mainstream media in the, in the following day? Yeah, I think that's, I think that's likely. I don't think, you know, because there hasn't been an announcement, that's it. We're not having a cathode tariff job done. You know, the Trump administration does, you know, issue statements on stuff like copper tariff, it has issued a number of updates since last year on, you know, little aspects of the 232 tariff. So I don't see why it will stop doing that. And I check the arbitrage this morning and it's not collapsed down as potentially you might expect it to do if, if people read this as a signal that nothing would be coming. So I think there's still a chance for an update to come. I guess the longer it takes for an update to come, the more uncertainty and, and the more, I guess the less people will expect it. You know, if we're, if in six months time we still don't have an update or something like that, then I guess people will start thinking maybe there won't be one. One thing someone pointed out to me, which maybe the image created by Trump issuing a tariff around the July fourth weekend might be part of it. You know, if we hit see an announcement on, on, on their independence day, you know, sort of saying, or one also we'll get independence from minerals as well. Kind of thing, but we'll, you know, that it's part of that narrative and part of American exceptionalism and stuff like that. So a few people I've spoken to sort of have said maybe the update will come in the next few days and be tied into to that sort of thing. It is worth noting the US is busy at the moment. The certainly the administration is. There's, you know, peace talks with Iran. There's a 250th anniversary, the World Cup, among other things. And maybe there's focus elsewhere. Though to be honest, I actually thought that because of some things going on in the administration and and some challenges, certainly, you know, if you look at Iran or some other things going on in the US at the moment that maybe maybe I thought that the tariff could be seen as a good news story or or a political win for Trump. So I thought maybe it would come out this week, but, you know, I think there's a strong possibility we don't hear anything for a while. I think that's perhaps maybe the most likely scenario right now, but it's an interesting comment about a perhaps coming to the media with a bit of a splash on on the July 4th weekend in, and, you know, making a someone a dance out of it all. And I wouldn't necessarily be surprised by that either. So I guess we're going to wait and see. You mentioned the arbitrage. Is there anything else that you're looking at or digging into when it comes to that? Because it maybe collapses in the right work, but it sort of tightened fairly significantly from what was it around, a 650 tons between the CME and the LME a few weeks ago to where was it yesterday, about 170, something around there? Yeah. Do you think that it's just a natural fluctuation or generally do you think maybe more people in the market started to realise maybe nothing is going to happen? Well, I did wonder that this morning, actually. The arbitrage actually, you know, I mean, it's moved a little bit this morning. It's sometimes hard to tell for the US's up, but it does seem to be slightly broader this morning. It has collapsed in the in the last few weeks. It was at $5, $600 a ton and it sort of fell down to 200. And in retrospect, that might have been a sign that either as we were approaching the deadline, people started to, you know, I saw more and more people say maybe there's nothing's going to happen. But also maybe, you know, people maybe knew something's wrong term, but, you know, expected that they'd already know by then or sort of had an inkling that nothing was going to happen or knew something that wasn't going to happen. If you look at the arbitrage, it hasn't changed people's expectation of a tariff. It's kind of where it was before. And that will be an interesting one to look at. The longer it goes on, the longer we don't know, you know, you might expect to start to see it come down again. What about the Ford curve, Albert, then? Is there anything we can read into that as well? Yeah, so the CME is still in a relatively strong contango, which, you know, could be taken certainly to indicate that people expect something to bolster CME prices going forward. And that could be a tariff coming in. It's something we've mentioned before, but the CME is a duty included price. So if there was a 15% tariff, you'd expect that to be reflected in the CME price. And so on the Ford curve, you know, when you see it in such a strong contango, maybe that's indicating that, you know, people still expect that people still expect a tariff to come in. You know, obviously, CME can be in contango for other reasons, you know, whether it's positivity about future demand or stuff like that. But, you know, I think to me, this is indicating, especially when you look at the the LME Ford curve, which continues to be a lot less, it's basically flat really. That kind of indicates that people are expecting the CME to push up above the LME in the longer term. So, you know, the market's not gone, oh, there will be no tariff. It's still pricing in some of that uncertainty. And pricing it in in a sort of by pushing the price up on CME. Yeah. Like I said, when the US opens today, we might see a little bit more reaction from the market as well and over the coming days. So I'm certainly something to to keep an eye out for. I mean, the intention of this podcast today was to be a bit of a deep dive on the tariffs again to unpack what happened. We don't have that announcement, but I still think we can use this as an opportunity to, you know, maybe look back and provide some sort of context around this wider notion of US protectionism when it comes to copper. So, I would just for perhaps those less familiar with the tariffs in Russian out behind this section 222 investigation. Can you provide that sort of background context to why the US are looking at these measures? I mean, broadly speaking, just how reliant is the US on copper imports then and across various different products. Obviously, we've got refined on one end and scrap on the other perhaps, but just tell us a little bit about sort of the material flow and US dependence on imports. And why, you know, maybe these import measures are a way of bolstering, perhaps, the US position when it comes to copper. Yeah, I would say firstly that there are good reasons for the US to be considering some sort of protection or help for the copper industry. Firstly, I would say, however, the US administration likes tariffs. Donald Trump has, through both his statements and actions, made it quite clear, he likes a tariff. Now, one of the reasons why 232 is a good one to use is, you know, they're all above-born legal. You know, I think everyone remembers Liberation Day a few years ago, those tariffs were sort of ruled unconstitutional legal, right? 232 tariffs are not considered in that sort of legal judgment. So, they were actually, you know, permissible and allowed. So, first of all, it is a good way of generating tax revenue potentially and generating money for the US. It is also, you know, clearly ingrained in Trump's policies and political beliefs that tariffing imports is beneficial for the US broadly. Now, whether that's reflected by sort of logical arguments on the other side is broadly accepted by him that that's a good thing. So, I think that's sort of, you know, maybe my first point. However, you know, if you look at the US copper situation, they are a very large producer of copper concentrate, mine copper. They are also a very, very large producer of copper scrap. And they actually don't process enough of that to be self-sufficient on copper cathode. That's sort of interesting because if you look at them in terms of raw materials, the raw materials they generate, they are in a surplus of copper. But if you look at it from a refined angle, they're actually in a fairly significant deficit and they have to import a large amount of copper cathode. If you were to bring in a copper cathode tariff, that is the issue that you are dealing with. It would have given the US smelters basically a benefit compared to the rest of the world of a sort of 15% price slapped on top of what they can get when they sell their copper on. And in theory, that should have boosted investment in space. In theory, right? In theory. Because it's terracistically could be considered as, you know, if you look at a carrot in sticks and sentives or punitive measures, you know, it's certainly more of a stick than it is a carrot. Would it an alternative? I'm not, you know, perhaps asking you to say whatever better or not, but would an alternative have been to incentivize that midstream, the refining and the smelting or domestically in the US more meaningfully rather than, you know, putting these protections measures in directly look to incentivize that gap. So it is a considerable gap, right? And I'm looking at a chart here and maybe it's a fraction out of date, but you write in terms of what the US imports in terms of refined cathode, it's, you know, let's say bullpark a entry kilotons or whatever it is. And then you look at what is exported, this is on a net basis, what it was exported. In terms of cons, it's, you know, for maybe 500 and scrap it's even more than that. So on a net basis, like you said, there's more than enough copper units in the system. It's just perhaps not being refined or smelted in the US. And that's the gap, that's the bottleneck, right? Yeah, and I agree, I think there's, I think one of the problems with tariffs, especially as they are a Trump policy, you know, there are things that he likes. And if you were to invest a couple of billion dollars, probably even more, and a lot of time, you know, it's a lot of working capital, a lot of things to do, a lot of hoops to jump through to open a news monitor. Doing it on the basis that the current president, who may not be, well, who technically can't be president in two years time or three years time, has put in a policy that he thinks will support that industry. It's not a huge amount of certainty, you know, if that tariff was to get overturned, bearing in mind also, you know, there's lots of hoops to jump through, you have to go and ask her, you know, your shareholders, your board, your, you know, your lenders, all these, all these people have to agree that this investment is a good idea. And you're sort of saying, yeah, but, you know, we've got a tariff now. So say a tariff came in. By the time any smelter was built in the US, if you started to, if you decided on the basis of tariff, tariff came in today, you said, let's build this smelter. It would not be built by the time the Trump presidency ended. And therefore, you're, you're basing the investment decision on a 15% you know, say it was a 15% tariff, a 15% bonus that might not exist by the time your operation. Yeah, it's not guaranteed to be bipartisan, is it? No, not at all. And you know, there's a chance that the Democrats would, would leave some aspect of it in. I mean, certainly if the tariff being talked about was smaller, they might, you know, if it's a 3% tariff, they might leave it in because, you know, why not kind of thing. But a 15% is quite large, you know, it's going into a lot of industries in the US, they might see it as inflationary and this sort of thing. But you know, there are other ways to incentivize investment, you know, you could offer tax breaks for, you know, a set period of time, you could offer interest free loans, you know, this sort of thing that actually you can sign into contracts and can be there for a while and actually see it in. If you look at Argentina, they're trying to incentivize some new mind capacity and they've got this thing called a riggy system, which is basically a guarantee that means, you know, even if this government loses power and stuff like that, you know, this is a really long-term investment, sign this and we'll guarantee this for longer than this administration. A tariff doesn't do that. A tariff is, you know, US administration base. So it might not necessarily incentivize the type of investment the US would want and it might not necessarily therefore plug that cap. It might do it briefly for a short period of time. You might see, not, you know, not cover the entire gap, but you might see more material being processed locally if, you know, the two smelters that do exist in the US can boost utilization rates because, you know, why not try and make as much copies you can while the arbitrage is where it is. But it doesn't necessarily, to me, seem like the best long-term alternative. It's certainly if it's not bipartisan. And I would say actually another thing in terms of addressing whether this policy of tariff makes a huge amount of sense is looking at where US copper imports come from. Now, if you read statements from the US government, they explicitly, in some statements on copper, about the two, three, two investigation mentioned China. The US does not import Chinese copper. Last year it imported a little bit of copper from China, but it was actually re-exports of CME registered material like Chilean brand material. The US mainly imports copper from Chile, from Canada, US import quite a lot from Mexico. The thing that's gone down a little bit in recent years, we've seen some imports from Australia, from Japan. As far as the US has allies, these are allies. And if you're looking at it from a sort of reliance on people you don't want to be reliant on, these are good trading partners. So I think that's one thing that always confuses me about the narrative around the US being reliant on imports. Obviously, the US doesn't want to be exporting so much raw material and importing so much cathode. But in terms of it being a sort of genuine national security risk, I don't necessarily see that. The one argument that I've heard to counter that is from an external perspective, I view Canada and Chile and Mexico's allies of the US. But potentially the US administration doesn't see things in that way and doesn't want to be reliant on anyone. That's coming to keep going, not going on on anyone. Which is understandable in today's climate. It's a common theme and it's, you know, undoing the globalization of the last 10, 15 years, it's about localization or we use a term, even two years ago, Frenchoring, but it looks like we've even moved more central than that and bringing supply domestically and ensuring that that risk is completely eliminated, not relying on any alternative sources. So, you know, perhaps there's an element of that. Obviously, one thing we've not touched on and it's probably for another recording is the general inflationary nature of tariffs as well. So maybe that's something to consider in future. But you mentioned obviously China, the US does export a lot of scrap to China though. Export controls specifically pertaining to scrap. Is that another potential option or leave at the US administration could pull? Yeah, it's, I mean, export restrictions on scrap and concentrates are mentioned in the announcement from last year. They are relatively minor restrictions. One of them is also slightly poorly phrased. The scrap bit sort of, it references high grade copper scrap but doesn't give a definition of what that is. So it's sort of hard to know exactly, you know, what it classifies under that. But the restrictions they put on are quite, it's essentially that they can't export too much scrap and too much concentrate, but both concentrate and scrap exports are now currently well within those bounds. And we'll likely continue to be it's sort of relatively lax limiter. I think one thing that's interesting. To last year, my view was, you know, a China actually, when the US and China are having a lot of tariffs back and forth, scrap exports from the US to China slowed quite significantly. And then they picked up when some of that situation resolved. But I sort of thought, well, you know, the CME, LME arbitrage is so high. Why aren't these scrapies, you know, selling stuff in the US? You know, they're getting, you know, in theory, if you're selling against the CME price versus against the LME price or the Shiffy price. You're getting a lot better deal. But the US just didn't have the capacity to process that material. And so what actually you saw was, you know, the, the sort of discounts on scrap against the CME being quite significant. And you know, it was realistically being so close to LME prices, which was, you know, quite an interesting, interesting trend. The scrap export controls are often something that's talked about. But, you know, the US needs to invest in a, in some sort of scrap smelting capacity. There's a good facility built by Rubis recently in Richmond, though it doesn't currently have a tank house. I don't believe there's any public statement saying that they will have a tank house, which essentially means it can't make cathode. It can only make blister sort of pretty refined copper, not, you know, the cathode. There's more broadly used. And I would go back to Europe for turning into cathode. Yeah. So actually, I think initially that was the plan. I think that was sort of a Rubis' plan was that the US has a large amount of scrap, make this facility and send it back to Europe to be turned into cathode. I believe. I don't know if that sort of publicly stated. I think that was the interpretation lots of people gave to it. But actually, if you look at Anode and Blister exports last year, it appears that actually it did stay in the US. And get used there potentially because of that arbitrage meant that it was, you know, there were benefits to keeping that semi-refined copper in the US. OK. Thanks for all your comments and thoughts on the tariff album and what is a tariff special, should we call it? I mean, let's look to, it's a non-special, really. Let's wrap this up. I'm going to hold your feet to the fire here and say, you know, before we record the podcast next week, are we going to hear anything on this? So what is your, what's your gut feel your base case take in terms of tariff? My gut feeling would be that if we do hear something, it will be that there will be a cathode tariff. My view is that the Trump administration likes tariff. How would Lutnik has in the past referenced the fact that the US administration intends to use the levers available to them to tariff imports? And explicitly referencing two through two in that statement. And this was just after the nation's, nation-focused tariffs got overturned. So the US administration has said they want this in some regard. So I think there's a chance that they do it. I also think there's a chance we don't hear. I think maybe that's, maybe that's, maybe that's my guess, is that if we hear something, it will be tariffs, but we might not hear anything. And I can't wait for next week when it's, we hear something and it's not tariffs and the, the, of the two options I gave both were wrong. Or we're sat here again talking about a non-announcement. So yeah, but we will save that for next week. So let's draw this session, this recording to close now. So thank you once again, Albert, look forward to hearing from you next week. Maybe, maybe not, we might have some further clarity on the US import tariff situation. So we can hope at least, but for now, that's all for this episode of Benchmark's Copper Weekly. Thank you very much for listening. Thank you. If you found this show useful, follow us on Spotify, so you don't miss next week's episode. For deeper analysis and data on copper supply, demand and prices, visit Benchmarkminerals.com for a slice of copper. Thanks for listening and join us next week as we break down the latest moves in the copper market. Bye for now.