The Copper Arbitrage
The Copper Arbitrage
2025 brought about an interesting trade idea in CME and LME-delivered copper futures this year. First, let's talk about exactly what it is. Copper arb refers to the price difference between CME (USA delivered) Copper and LME (London delivered) Copper. As a result of regional supply and demand, tariffs, and contract specifics, the two don't always trade at the same price. When the gap between the two prices gets very wide, traders can buy the cheaper leg and sell the expensive leg to lock in an almost riskless spread (arbitrage).
A few key differences between the two contracts:
A few key differences between the two contracts:
Specs
This refers to the nature of the delivered product. Covers things like weight, quality, lot size, shape, etc. CME delivered copper must be duty-paid and must be cleared of US customs. LME delivered copper, on the other hand, are typically duty-unpaid and more globally oriented.
This becomes relevant when tariff shocks hit.
Regional Supply and Demand
There are key differences in US demand and rest-of-world (ROW) demand, import reliance, and premiums which create price skews in favor of one contract or another. Logistic challenges, inventories, spreads, and geopolitical tensions also affect supply and demand.
Tariffs
Tariff expectations can often be capitalized into CME futures, whereas they don't show up on LME futures until the actual cashflows change (tariffs go into effect).
How a Trader Could Take Advantage
When CME futures are trading at a large premium to LME futures, a physical metals trader will do the following:
1. Source copper outside of the US thats priced according to the LME.
1. Source copper outside of the US thats priced according to the LME.
2. Hedge! Sell CME futures and buy LME futures for the same expiration (tenor) to lock in that spread, and sell forward to a US based buyer (or deliver into CME if the specs match) to take advantage of the rich US leg.
3. Ship to a delivery port in the US, pay freight, insurance, financing, handling and any 3PL.
3. Ship to a delivery port in the US, pay freight, insurance, financing, handling and any 3PL.
Over this year, the CME premium spiked on tariff fears, and the above process offered anywhere between $800 - $3,000+ per metric ton. A once-in-a-lifetime trade.
There were, of course, some frictions to this trade. The delivered metal had to be deliverable against the contract specs, there were warehouse capacity bottlenecks, and the increasing premium on ROW copper.
On the other hand, the paper trade (on futures) was a bit easier to execute but came with its own risks. The trader would:
1. Sell CME futures and buy LME futures for the same tenor when CME was trading at a premium to LME. PnL comes from that spread narrowing (CME moving down, LME moving up)
2. If the spread hasn't converged by expiry, the contract would need to be rolled (close the owned expiration and open the next expiration), which comes with its own costs. The trader needs to watch time spreads because roll costs can eat into arb.
3. Adjust position size and hedges to make sure the trade is neutral to the price of copper and only exposed to the arb spread.
4. Once the spread narrows, close the trade and lock in the captured spread minus costs.
On the other hand, the paper trade (on futures) was a bit easier to execute but came with its own risks. The trader would:
1. Sell CME futures and buy LME futures for the same tenor when CME was trading at a premium to LME. PnL comes from that spread narrowing (CME moving down, LME moving up)
2. If the spread hasn't converged by expiry, the contract would need to be rolled (close the owned expiration and open the next expiration), which comes with its own costs. The trader needs to watch time spreads because roll costs can eat into arb.
3. Adjust position size and hedges to make sure the trade is neutral to the price of copper and only exposed to the arb spread.
4. Once the spread narrows, close the trade and lock in the captured spread minus costs.
2025 Timeline
Early Arb (Feb-Apr):
When the CME premium first blew up to $600/mt, lock in the spread. Source brands that are deliverable to both exchanges, and lock in shipping routes to the US. Hedge outright copper prices with futures.
The trader is in early and has time to deliver metal before the tariffs could go into effect.
Momentum (July's 50% Talk)
Add to the short CME / long LME position as the premium reached into the thousands. Scale out as headlines confirmed tariff chatter.
The biggest risk here is policy reversal (as happened on July 31st) when copper got exempted. Premium collapsed in hours, wiping out gains for late entrants, but adding to the gains of those already in the trade. For those that entered late, the direction was not the issue, but the timing and liquidity. Getting out was hard as spreads gapped.
The biggest risk here is policy reversal (as happened on July 31st) when copper got exempted. Premium collapsed in hours, wiping out gains for late entrants, but adding to the gains of those already in the trade. For those that entered late, the direction was not the issue, but the timing and liquidity. Getting out was hard as spreads gapped.
If traders timed this and positioned well, at its peak, this arb was earning thousands of dollars in gross profit (before costs).
Sources:
Sources:
LME Insight, Bloomberg, Reuters, Yahoo Finance, Mining.com, Benchmark Source, Reddit
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