JP Morgan’s planned copper ETF could “wreak havoc”

May 25th, 2012 | By | Category: Commodities

JP Morgan’s proposed physical copper ETF, the JPM XF Physical Copper Trust, has drawn criticism from several metal fabricators and a major copper trader, who fear the fund would “disrupt the world market”, “inflate prices” and ultimately “wreak havoc on the US and global economy.”

JP Morgan's planned physical copper ETF could "wreak havoc"

Some industrial copper users believe that JP Morgan's physically-backed copper ETF could cause a “substantial artificially-induced rise in near-term copper prices on the LME”.

These views, believed to originate from Southwire, a major US manufacturer of electrical wire and cable, and Red Kite, a London-based hedge fund and metals trader, were presented to the Securities & Exchange Commission (SEC) in a letter sent on their behalf by New York law firm Vandenberg & Feliu.

If approved by the SEC, the NYSE will permit the JPM XF Physical Copper Trust to sell shares of an ETF backed by physical copper that must meet the London Metal Exchange (LME) requirements for copper available for immediate delivery.  The copper backing this ETF will, on purchase, be removed from the market.

For the most part, the only such copper available to satisfy the ETF’s requirements is copper in LME warehouses. This is physical copper available to satisfy short positions on the LME and is also used as a market of last resort by physical sellers who may have a surplus not otherwise committed to fabricators.  There is currently only around 200,000 metric tonnes of copper stored in LME warehouses, which represents a 57% drop in inventory since last year.

The JP Morgan offering initially calls for the immediate removal from this market of as much as 61,800 metric tonnes of such copper, or the withdrawal of more than 30% of the copper available for immediate delivery worldwide. The letter claims that the removal of this copper from this market, and more as the ETF gains AUM, will result in a “substantial artificially-induced rise in near-term copper prices on the LME”.

According to the letter, this will hurt copper merchants and industrial users, such as fabricators (metal workers), who may require physical copper from LME warehouses to close out their hedge positions or to satisfy short-term needs for additional supply.

While the proposed JP Morgan ETF has caused the biggest stir, perhaps because of JP Morgan’s size and market presence, the bank isn’t the only company planning to launch a physical copper ETF in the US. Indeed, London-based ETF Securities has filed with the SEC to roll out a suite of physically-backed industrial metal ETCs (Exchange Traded Commodities), as has BlackRock.

Supporters of the planned launches counter claims by highlighting that such products already exist (examples include the ETFS Physical Copper (PHCU) from ETF Securities and the db Physical Copper ETC (XCO1) from Deutsche Bank, both listed in the London Stock Exchange) and that these have not had a destabilising impact on the market.

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