By Stuart Burns
The SEC has finally given its approval for JP Morgan to launch the first-ever copper ETF backed by the metal itself. Investors will soon have the option of investing directly in physical copper through the convenience of an exchange-traded fund, just as you can with gold, silver, platinum, and palladium.
So can we rush out to buy units in JP Morgan’s XF Physical Copper Trust? Well no, not quite yet, and if a last-minute challenge by about half of the US copper-consuming industry — and even some copper funds like Red Kite in London — have their way, we never will.
According to the FT, a group of copper users has accused the Securities and Exchange Commission of being “arbitrary and capricious” in its decision to approve the JPMorgan physically backed copper fund. The FT says their move is likely to pave the way for a formal appeal, potentially further delaying the launch of the product, which was first publicly proposed in October 2010.
The consumers’ gripe is that allowing the bank to hoard copper will distort the market: investors’ demand for copper as an investment product will drive up the physical holding of the metal in JPMorgan’s warehouses, denying consumers access to much-needed metal. They fear that with China already holding unspecified quantities of refined copper in Shanghai bonded warehouses, yet another party in the market holding admittedly more transparent stocks will take yet more metal out of circulation.
There could be some truth in this if enthusiasm for the ETF takes off as rapidly as JPMorgan hopes, but the most likely outcome will be a relatively slow and gradual demand which will not put undue pressure on copper stocks.
Opponents of the plan say the new investment product will absorb 61,800 metric tons of copper, although quite how they arrive at this figure is not clear. What about copper ETFs and the futures market? And what does it mean for metal buyers?
Copper ETFs and the Futures Market
It should not be overlooked that there are products in the ETF market that allow investors to gain exposure to copper prices via the futures market. In 2007, the first futures-based, exchange-traded note was approved; the iPath DJ-UBS Copper Total Return ETN (JJC), which tracks an index that reflects copper futures contracts. That product has had modest success, attracting more than $100 million in assets under management.
Since then, two other futures-based, exchange-traded products – the iPath Pure Beta Copper ETN (CUPM) and the U.S. Copper ETF (CPER) – have attracted only a few million dollars each. Futures-based ETFs, though, do face problems of rolling losses and fees that dilute the returns. A physically backed product could avoid these, although it will still face storage and insurance costs, which will translate as fees that will inevitably come out of returns.
What This Means For Copper Buyers
We have some sympathy with consumers fearful of the impact physically backed products could have on the market. Financial involvement has distorted the aluminum market so badly that there are officially some 5 million tons and potentially twice that sitting isolated from the market in park-and-ride finance deals. The resulting competition for metal has created premiums for primary ingot over and above the LME price, premiums that are now finding their way through to consumers of extrusions and rolled products as additional costs being passed on by the mills.
It wasn’t ETFs that caused such distortions in the aluminum market, but it could be ETFs that start the ball rolling in copper.