The silver lining in Donald Trump’s latest misguided threat

Rio Tinto and BHP will have read Donald Trump’s executive order directing the US Commerce Department to examine whether there should be tariffs on copper and will have been encouraged. A project that has been on the drawing boards for more than 12 highly frustrating years is now closer than ever to getting a go ahead.

Rio has a 55 per cent operating interest, and BHP a 45 per cent interest, in the Resolution Copper project in Arizona; a project that has been stalled for more than a decade by environmental issues and, more particularly, opposition from a Native American tribe that places cultural significance on some of the land needed for the mine.

Donald Trump signed an executive action directing the Commerce Department to examine possible copper tariffs this week. Credit: AP

While the orebody is at extreme depths – between 1500 metres and more than 2000 metres – the project, on which Rio and BHP have already spent more than $US2 billion ($3.2 billion), has the potential to produce about 450,000 tonnes of copper a year, or about 25 per cent of US demand.

The project got close to an approval for a proposed land swap that would have cleared the way for construction during the dying days of the last Trump administration, but the incoming Biden administration effectively froze the approvals process.

Now, Trump is making it clear that he sees rebuilding a domestic copper industry as central to America’s national security.

US domestic production of copper has been declining quite rapidly. It imports about 45 per cent of the 1.6 million tonnes a year of copper that it consumes, mainly from Chile, Canada and Mexico.

Given that he’s already slapped 25 per cent tariffs on imports of aluminium and steel, it seems almost inevitable that there will be US tariffs on copper, with speculation ranging from a rate of 10 per cent to the 25 per cent imposed on the other metals.

Copper is arguably the most strategic of metals, given how central it is to most 21st century technologies.

Long-term growth in demand is being driven by its use in climate change-related technologies like wind turbines, solar, hydro, electric vehicles and batteries but also in the data centres that are being built to support artificial intelligence, which will consumer vast amounts of electricity ... and copper.

For Rio and BHP, not only is Trump’s interest in copper likely to end the impasse over Resolution, but US tariffs on copper and higher US copper prices could also help improve the project’s economics.

Rio has a 55 per cent operating interest, and BHP a 45 per cent interest, in the Resolution Copper project in Arizona which has been stalled for more than a decade.Credit: AP

It was instructive that the share price of the biggest US copper producer, Freeport-McMoran, jumped 3.25 per cent on the news of the executive order.

Tariffs raise the price of imports, which then enables domestic producers to lift their prices to match.

There are estimates that a 10 per cent tariff on copper imports would flow through to a 9 per cent increase in Freeport’s earnings before interest, tax, depreciation and amortisation – i.e. the benefit of a tariff regime would flow almost entirely through to the earnings of domestic producers.

Australia wouldn’t, despite having one of the world’s biggest copper resources, be affected by a US tariff.

Almost all Australia’s copper output is sold into the Asia Pacific, with China, Japan, South Korea, India, the Philippines and Taiwan the major customers. (China is a major producer and has about a 44 per cent share in processing copper but is generally a net importer because of the vast size of its industrial base).

Australian miners, including BHP and Rio Tinto, do, however, have mines or interests in mines in South America that ship copper to the US.

While the US interest in regenerating its copper industry is understandable, tariffs are a double-edged sword.

As will occur with the tariffs on aluminium and steel when they go live next month, the cost of imported copper will rise, domestic producers will increase their prices to take advantage of the windfall opportunity and prices to the consumers of the metal will rise and subsequently end up in higher prices for the vast range of products that include copper in their manufacture.

US tariffs (it shouldn’t have to be repeated) are ultimately paid mainly by US consumers and add to inflation.

The likelihood of copper prices that are higher in the US than elsewhere will create – indeed already has created – an arbitrage opportunity.

Even before this week’s executive order, Trump had indicated he would consider tariffs on copper and products that include copper. That sent copper futures traded on Comex in New York alight and opened up a gap that reached as much as $US1300 a tonne between US copper prices and the London price.

After Trump’s order was announced that trans-Atlantic price gap, which had narrowed to about $US600 a tonne, spiked to $US1000 a tonne before ending up around $US700 a tonne.

Not surprisingly, there have been drawdowns of physical copper stocks at the London Metals Exchange as metals traders have rushed to ship copper to the US before any tariffs are in place. It costs $US200 to $US300 a tonne to ship metal to the US, so there is a very profitable opportunity if the traders can get the copper into the US ahead of the tariffs.

Copper is arguably the most strategic of metals, given how central it is to most 21st century technologies.

That arbitrage illustrates the downside of tariffs. US companies and consumers will pay significantly more for a key input into many products and technologies, some of them critical to economic security and defence technologies, than their competitors.

The challenge for the US if it does impose tariffs on copper and copper products is that it can take more than a decade between identifying a resource and bringing it into production. Rio first filed a mine plan for Resolution in 2013 and if the project did get a go ahead, it would take a decade before there was any output.

There’s also the problem that, Resolution apart, there aren’t a lot of large and high-quality new copper resources in the US, or anywhere else for that matter.

With the world’s existing orebodies being depleted and copper grades diminishing, there are only a relative handful of new copper projects on the drawing boards anywhere in the world.

Giving Resolution a green light and making existing domestic producers more profitable by imposing tariffs on imported copper might create some incentives for increased production and, perhaps, investment in processing.

It is, however, unlikely to be transformative, especially in the near term, will make US industry less competitive and will flow through to higher end-prices for goods that incorporate copper.

That is, however, rapidly becoming the new norm for businesses in America as the deployment of Trump’s beloved tariffs spreads.

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