London Metals Diverge Ahead of U.S.-China Trade Talks: A Volatile Equilibrium

The London Metal Exchange (LME) faced a wave of uncertainty in early May 2025 as prices for key industrial metals dipped amid heightened anticipation of U.S.-China trade talks. Copper, often dubbed the “economic bellwether,” led the decline, falling 0.9% to $9,456 per ton, while aluminum and zinc also softened. Yet, this broad weakness masked deeper divergences: Shanghai Futures Exchange (SHFE) prices for copper rose slightly due to dwindling monitored stocks, highlighting a fragile equilibrium between geopolitical risks and physical market dynamics.

The Copper Conundrum: Volatility Amid De-escalation Hopes

Copper prices swung sharply on Wednesday, initially climbing to $9,582 per ton during Asian hours before retreating to $9,445 by India time. Analysts attributed this volatility to traders hedging bets on the outcome of weekend talks in Switzerland, where U.S. and Chinese officials aimed to address tariffs that have surged above 100% since late 2024.

The SHFE’s most-traded copper contract, however, rose 0.7% to 78,220 yuan (≈$10,759) per ton, driven by a 13% drop in LME monitored stocks to a 10-year low. This divergence underscores a critical point: physical supply constraints in Asia are insulating local prices from broader macroeconomic pessimism.

Aluminum and Zinc: Caught in the Crossfire

Aluminum fared worse, with LME prices falling 1.2% to $2,398 per ton—the lowest since January—as traders reduced speculative positions ahead of the talks. The SHFE aluminum contract mirrored this, dropping 2% to 19,465 yuan. Zinc also declined, though modestly, reflecting weak demand signals from China’s construction sector.

Lead and tin bucked the trend: LME lead rose 0.5% to $1,931.50 per ton as auto manufacturers stockpiled ahead of potential tariff hikes, while SHFE tin climbed 0.4% on speculative buying.

Trade Talks: A Fragile Catalyst for Recovery?

The weekend talks in Switzerland emerged as the linchpin for market sentiment. While U.S. Treasury Secretary Scott Bessent emphasized a “de-escalation” goal, traders remained skeptical. A key wildcard was China’s central bank decision to cut the required reserve ratio (RRR) by 50 basis points, injecting 1 trillion yuan into the economy—a move analysts called “timed to stabilize growth before the talks.”

President Trump’s pledge to review trade agreements over two weeks added to uncertainty. “The market is pricing in a 40% chance of a tariff truce,” said one Hong Kong-based metals trader. “But until we see concrete steps to reduce levies, volatility will persist.”

The Inventory Paradox: Copper’s Geopolitical Tightrope

The divergence between LME and SHFE copper prices reflects a broader structural shift: COMEX inventories in the U.S. rose to 115,000 tons, as traders shifted supplies from Asia to hedge against tariffs. Meanwhile, LME monitored stocks in Shanghai fell to 45,000 tons, fueling premium spikes in Asian manufacturing hubs.

This imbalance has created a “two-tier” market. “If talks fail, U.S. buyers might face logistical hurdles to access cheaper Asian supplies,” noted an LME analyst. “But a de-escalation could trigger a 5-7% rebound in LME prices as premiums normalize.”

Fed Watch and LME Policy: Adding Fuel to the Flames

Compounding uncertainty were the Federal Reserve’s upcoming rate decisions and the LME’s revised OTC rules. The central bank’s reluctance to cut rates—despite slowing U.S. GDP—kept dollar-denominated metals under pressure. Meanwhile, the LME’s decision to double fees for OTC contracts (versus exchange-traded ones) risks further fragmenting liquidity, a point of contention in ongoing consultations.

Conclusion: A Delicate Balancing Act

London metals are caught in a tug-of-war between physical supply tightness and macroeconomic headwinds. Copper’s $9,456-per-ton price—down 2.3% year-to-date—reflects trader caution, but the SHFE’s resilience hints at a floor. With $1 trillion in Chinese liquidity and a 50% probability of a tariff truce, the path to recovery hinges on two variables:

1. Tariff Reductions: A 5-7% price rebound is plausible if talks yield concrete agreements, but mere dialogue risks leaving metals in a $9,200–$9,600 per ton range.
2. Inventory Rebalancing: If COMEX stocks stabilize and LME monitored stocks rebound above 60,000 tons, premiums could ease, supporting a broader recovery.

Investors should monitor the U.S.-China tariff timeline and LME monitored copper stocks closely. A failure to de-escalate by June could see aluminum and zinc test 2024 lows, while a breakthrough might trigger a 10% rally in copper—a bet worth considering at current levels.

In this volatile landscape, physical fundamentals and geopolitical resolve are the twin engines of price direction. For now, the scales remain tilted toward caution—until the talks tip the balance.