First U.S. physical copper ETF gets okay, but some cablers not pleased
JPMorgan Chase & Co. (JPM) has won regulatory approval for the first U.S. exchange-traded fund backed by physical copper, but several cable companies claim that this action could be disruptive to the market.
Per media reports, the proposed rule change by NYSE Arca Inc. to list the JPM XF Physical Copper Trust was approved on Dec. 14. Further, BlackRock Inc. (BLK) and ETF Securities, Ltd., also want to start physically backed ETFs for industrial metals in the U.S. ETFs trade like stocks, giving investors access to commodities such as copper without taking physical delivery. The claim is that the copper fund only holds about 2,000 metric tons of copper, a small amount compared to the more than 20 million tons that the International Copper Study Group (ICSG) said will be mined and used this year. ICSG, fund supporters said, notes that copper output is set to top demand by 458,000 tons in 2013.
A group of industrial copper consumers that includes Southwire Co., Encore Wire Corp. and AmRod Corp. and hedge fund RK Capital LLP, have opposed the plan, saying such funds would leave less copper available for manufacturers, creating shortages and driving up prices.
A statement from Southwire expressed the company's disappointment with the SEC's decision. "Throughout this process, we have maintained we do not believe a physically backed copper ETF is in the best interest of U.S. copper fabricators. We hold to that belief. The physical supply and demand balance of copper cathode remains very tight, especially in the U.S. market, where there is very little available spot copper to serve the needs of a recovering and growing construction market. Removing a large part of this available inventory to secure JPMorgan's ETF, and maybe other ETFs to come, will increase volatility associated with copper pricing and potentially create a shortage for 'immediate delivery' copper cathode. Ultimately, this decision only will hurt American copper fabricators. Southwire is evaluating the options before us as we decide on a response."
Also opposed to the action was John Gross, the long-time publisher of The Copper Journal and president of JE Gross & Co., Inc., (www.jegross.com), price risk management consultants. "While the copper ETFs will create potential trading opportunities for investors, (maybe) they will also have the potential to cause problems for consumers of copper if in the event the market becomes tight for whatever reason. While most people don't remember it now, there was a severe shortage of copper in the early 1970s to the extent consumers had to request the U.S. government release copper from the 'strategic reserve' in order to help keep the industry operating. "So the question is: If market conditions tighten and metal is held in inventory to support the ETFs what happens – other than the price going up? The other disappointing aspect of the SEC decision is that their staff did not see any relationship between prices and inventory levels. While this view may be accurate relative to the past four years, it is only because of QE 1, 2, 3 & 4 that metal prices have risen while at the same time inventory levels have also climbed. If one were to look back to the 1970s, 80s and 90s there is a clear inverse relationship between inventories and prices. With the approval for copper ETFs now made, Pandora's Box is now open."