A Record Price and a Surplus in the Same Market

Copper set a record on the London Metal Exchange last month at 14,875 dollars a tonne, and a record in New York at 6.83 dollars a pound. The International Copper Study Group, which does this for a living, expects the refined market to run a surplus of about 96,000 tonnes this year and a larger one next year. Both statements are accurate.

The reconciliation is geographic. There is roughly 700,000 tonnes of copper sitting in American warehouses, a record and more than double the level of a year ago, while London holds about 243,000 tonnes after a fall of some forty percent between late May and early September, and Shanghai sat near a sixteen month low in September. The metal exists. It is in the wrong country, and it went there because of a tariff that was never actually applied to it.

The Section 232 copper tariff took effect on the first of August last year at fifty percent, and it covers semi finished products and derivatives: pipe, wire, rod, sheet, tube, fittings, cable. It explicitly excludes ores, concentrates, anode, cathode and scrap. A phased duty on refined metal was sketched for January 2027, contingent on a report that was due at the end of June. As of last month the administration had not decided and would not say when it would. So refined copper still enters the United States duty free, and more than a year of anticipatory shipping has stranded a continent's worth of inventory behind a wall that was never built.

The Historical Echo

Copper has been here before, and the precedent is worth studying because the damage it did was permanent and it did not show up in the price.

Between the middle of the 1960s and the middle of the 1970s, strikes and nationalisations in Chile, Zambia and the Congo disrupted supply so badly that the market split in two. The producer price sat near thirty cents a pound while the London market traded near fifty, and the subsequent surge carried to 1,400 pounds a tonne in April 1974 and 1,590 by 1979.

What happened next had nothing to do with mining. Between roughly 1965 and 1973, American housebuilders substituted solid aluminium wiring for copper in residential branch circuits, directly because of the sudden escalation in the copper price. Copper never got that application back on the original terms. The installed base became a recognised fire risk and a remediation industry, and aluminium went on to take overhead transmission and much of utility distribution outright.

That is the mechanism to watch. Substitution is triggered by a price spike with a supply cause, it gets specified into codes and product designs with a lag of several years, and it does not reverse when the price falls. It is already being reported again. Norsk Hydro says the copper shortage is accelerating aluminium adoption, and North American aluminium producers are positioning for exactly that.

Where Patient Capital Is Positioning

Underneath the inventory distortion the supply side is genuinely damaged. A mud rush at Grasberg in September last year put some 800,000 tonnes of wet material into the mine, killed workers, forced a force majeure and cut this year's guidance by about thirty five percent; the mill was running at roughly two thirds of its pre incident rate in the third quarter and full capacity is not expected before the end of next year. El Teniente collapsed in July last year and had its expansion paused again this August. Kamoa-Kakula has been cut twice. Chile produced 369,500 tonnes in August, down thirteen percent and its weakest month since February 2011.

The smelters are in a stranger position still. The annual treatment charge, historically their core revenue, settled at zero dollars a tonne for this year, the lowest ever agreed. Chinese smelters have announced output cuts above ten percent and roughly two million tonnes of planned new capacity has been suspended. They are paying for the privilege of processing concentrate.

For long horizon capital the useful distinction is between a shortage of metal and a shortage of metal you can reach. A record price alongside a forecast surplus is the market telling you those are different things, and the gap between them is policy. Policy can be reversed with a signature. What cannot be reversed is the engineer who has already redesigned a cable harness in aluminium, and that is the part of this price spike that will still be here in 2040.

The Capital Memo