Proposed Physical Copper ETF Faces Resistance From Fabricators

by: Tom Lydon

The Securities and Exchange Commission gave the green light for the first physically backed copper exchange traded fund, but fabricators contend that the product would distort the metal's supply.

The JPMorgan XF Physical Copper Trust will be the first ever U.S.-listed copper backed ETF, whereas current copper-related fund offerings track copper futures. The trust will hold 61,800 metric tons of copper stored in global warehouses, or the equivalent to 27% of copper held in the London Metal Exchange's global network, writes Tony Daltorio for Money Morning.

However, a group of fabricators argue that the fund would "obviously drive up the price of copper available for immediate delivery and create shortages of such supply," and remove as much as 30% of available copper for immediate delivery.

Senator Carl Levin, D-MI, also believes that the fund would be a "blow to American businesses and consumers" and "allow speculators to create a squeeze on the market."

Nevertheless, the SEC says the ETF will track the copper price, not drive it, and allow investors to participate in the copper market. Similar copper ETFs in Europe have not disrupted the market overseas.

Moreover, the proposed physically backed ETF's 61,800 metric ton copper holdings is still miniscule compared to the 20 million tons of copper mined and used in 2012.

"Every institutional player in copper can buy copper, store it in an LME warehouse, or store it in a non-LME warehouse, and refuse to sell it to anybody else, no matter what happens to the price," United States Commodity Funds' CIO John Hyland said. "That is how that market works. That is how basically all commodities work. You just hold onto it if you want, except for the proposed physical copper ETF. [The fund] would be the only participant who cannot hoard copper."

Moreover, Hyland even argues that a physical copper ETF would increase liquidity in the copper market, as it would bring more investors to the table.

The SEC is reviewing the JPM ETF proposal until February 22. Additionally, iShares is also working on a similar ETF that holds 121,000 tons of copper, and ETF Securities is also planning a physical copper ETF this year as well.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.