As equities have soared recently, concerns have grown about complacency in the markets. Are investors overlooking the impact that tariffs will have on commodity prices and, consequently, businesses in the real economy?
Nowhere is that concern better illustrated than in the price of copper, which the White House last week threatened with a 50% tariff.
Futures contracts for copper increased by more than 31% since the start of the year, including a 9.5% spike during the week ending July 11.
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Businesses cannot simply wish away pricing disruptions like these. They will affect the cost of everything from the electric grid to home building to consumer electronics.
The impetus for these price hikes is the slow drip of tariff announcements, with Canada drawing the latest ire.
The U.S. relies on imports of copper to fill roughly half of its supply requirements, the majority of which are imported from the Americas.
Canada accounts for nearly all U.S. imports of unmanufactured copper.
according to the U.S. Geological Survey.
Refined copper accounts for 88% of all unmanufactured copper imports, with Chile supplying 65%, Canada 17%, Mexico 9%; Peru 6%, and other countries 3%.
China dominates in refining…
In terms of productive capabilities, China accounts for 44% of total copper refinery production, with the U.S. market share at only 3.3%.
…while Chile leads in mining…
Chile is the largest supplier of raw material, with a global market share of 23%. Peru and Congo each have 11%, while U.S. copper mines produce nearly 5%.
… and also in reserves
Chile also holds the largest share of copper reserves at 19% of total world reserves. China has 4% and the U.S. has nearly 5%. Among our trading partners, Australia and Peru hold 10% market shares of total reserves.
The takeaway
Sustained increases in commodity prices will have a negative effect on inflation and consumption. That will make it all the more difficult for central banks to balance the need for price stability at a time of slower growth, higher unemployment and stagnant wages.
In the short run, spikes in commodity prices will most likely disrupt the decision-making process for businesses. Alternatives to now-too-expensive intermediate goods will have to be adapted for production.
The futures price of aluminum, a copper alternative, increased by 8% in February, only to lose 18% by April. It has since increased by 12%.
That increase in North American markets stands in contrast with Europe, where prices had weakened because of risks of slower economic activity. Investors there are more attentive to the effect of tariffs on economic growth.
On Monday, copper trading on the New York exchange was in a 2% pullback from the prior week.
