The Securities and Exchange Commission has approved the first physical copper exchange-traded fund, over the concerns of copper fabricators who contend it will hurt their industry by putting too much copper in investors’ hands.
The proposed JPM XF Physical Copper Trust will be listed on NYSE Arca and will initially be backed by 61,800 tonnes of copper (30% of the copper available for immediate delivery globally), compared to current copper ETFs, which are backed by futures.
The trust plans to acquire its copper from locations with the lowest premiums, which are all located in the United States. “The biggest reason for these lower premiums is that demand for copper has remained relatively flat over the past several years, while demand in China has more than quadrupled over the past 10 years and continues to grow,” said lawyers representing U.S. copper fabricators.
In a May 9, 2012, letter to the SEC. the Vandenberg & Feliu law firm said three main LME warehouses in New Orleans, Chicago and St. Louis will be impacted by the J.P. Morgan copper ETF. “In fact, if successful the trust may be in a position to acquire all or substantially all of the entire U.S. supply of copper available for immediate delivery.”
The lawyers contend the situation will then impact copper stored in Comex warehouses in Arizona and California. “…The removal of large quantities of copper from the LME warehouses in the U.S. will result in the emptying out of substantial quantities of copper from the Comex warehouses.”
They contend “the successful launch of an ETF backed by copper would, by design, reduce the available supply, increase price and volatility, and ultimately, hurt competition particularly in the United States.”
In a July 16, 2012, letter to the SEC, U.S. Sen. Carl Levin, D-Michigan, argued, “The ETF will make the market more susceptible to squeezes, because it could be used by market participants to remove copper from the available supply in order to purposely artificially inflate the price.”
“By holding physical copper rather than LME warrants, the trust can control more of the available supply of copper without triggering LME reporting or rules,” he asserted.
However, the SEC said. “The commission does not believe that this listing and trading of the shares is likely to disrupt the supply of copper available for immediate delivery, which is what the copper fabricators predict would increase the prices of copper.”
The agency added that the price alignment process and arbitrage mechanism, “which are expected to align the price of the shares in the secondary market to the copper held by the trust, should mitigate the potential manipulation concerns…”
Barclay’s metal analyst Nicholas Snowdon told the Wall Street Journal that it was unlikely the JPM XF Physical Copper Trust would have much impact on the copper market because of a lack of investor appetite for such a product.
J.P Morgan and BlackRock initially filed for copper backed ETFs in late 2010. J.P. Morgan is the first to gain SEC approval. Now awaiting SEC approval on or before Dec. 24th, the iShares Copper Trust is expected to directly compete with the JPM XF Physical Copper Trust.