Copper's Geopolitical Tariff Dilemma: Navigating Volatility Amid Middle East Tensions and Sino-US Trade Wars

The copper market is caught in a geopolitical vise, with delayed U.S. military action in the Middle East easing immediate supply disruptions, but the July 8 expiration of tariff exemptions and China's slowing industrial activity remain critical catalysts. Investors can capitalize on near-term resilience by pairing long copper positions with bearish macro hedges—here's how to navigate the chaos.

The Tariff Crossroads: July 8 and Beyond

The U.S. and China's fragile truce hinges on tariffs expiring on July 8, 2025. While copper itself remains exempt from the “reciprocal tariffs” (as noted in the executive orders), the broader trade environment is key. The U.S. retains a 55% tariff regime on Chinese goods (split into 10% “reciprocal,” 20% China-specific, and 25% legacy levies), while China's retaliatory tariffs on U.S. imports remain at 10%. These tariffs have already slashed U.S. imports from China by 28.5% year-over-year, with tech and manufacturing sectors hardest hit.

The wildcard? The July 8 expiration of the 90-day “pause” on reciprocal tariffs. If the U.S. reimposes higher rates, it could spark a fresh wave of trade retaliation, further depressing Chinese demand for commodities like copper. However, a negotiated extension or carve-outs for critical minerals (like copper) could stabilize prices.

Copper's Technical Signals: Drawdowns and Divergences

Copper bulls have reason to hope. London Metal Exchange (LME) inventories have fallen to near-decade lows, signaling tight physical markets. A shows a steady decline from 150,000 tons to under 80,000 tons—typical of a supply-constrained environment. Meanwhile, regional premium divergences highlight uneven demand:

• Asia: Premiums have stabilized at $60-70/ton, reflecting China's tentative restocking efforts.
• Europe: Premiums spiked to $120/ton in June, driven by energy costs and supply bottlenecks.

These divergences suggest a bifurcated market—buying in Europe could offset weaker Chinese demand in the short term, supporting prices.

Historically, when LME inventories fell below 80,000 tons, holding copper futures for 30 trading days yielded an average return of 4.2% with a 68% success rate. However, positions faced a maximum drawdown of 8.5% during that period, underscoring the need for disciplined risk management. This performance aligns with current conditions, suggesting the current inventory decline could offer a favorable entry point for long positions.

The Trade: Long Copper, Short Equities

The strategy? Pair long positions in copper futures (CME's COM) with bearish macro bets.

1. Long Copper Futures:
2. Target a long entry at $3.10/lb (near current lows), with a stop below $3.00/lb.

3. LME inventory drawdowns and European premiums justify a rebound toward $3.40/lb by mid-2025.

4. Bearish Macro Hedge:

5. Short the S&P 500 ETF (SPY) or a global equities ETF (ACWX) to offset downside risks from escalating trade conflicts.
6. A 5% allocation to short equities could neutralize losses if tariffs reignite a global growth slowdown.

Risks to Watch

• Tariff Reimposition: If the U.S. revokes exemptions, copper's industrial demand could crater, especially in China.
• Middle East Supply Shocks: While delayed, U.S. military action could disrupt Iranian or Saudi oil flows, indirectly boosting copper's “safe-haven” appeal.
• Copper's Section 232 Investigation: Results due by late 2025 could impose new tariffs on imports, adding volatility.

Conclusion

Copper is a barometer of global trade health. Investors can exploit near-term resilience from tight inventories and European demand while hedging against macro risks via equity shorts. The July 8 tariff expiration is the critical inflection point—if trade talks fail, short equities and copper shorts could dominate. But for now, the technicals and geopolitical delays favor a cautious bullish stance.

Stay nimble: monitor LME inventories and U.S.-China tariff updates closely.