[Debate] Copper ETF plan would 'wreak havoc'

[Riaz K Tayob]

May 23, 2012 9:30 pm
Copper ETF plan would 'wreak havoc'
www.ft.com/cms/s/0/a7d32d4c-a4fb-11e1-b421-00144feabdc0.html

By Jack Farchy in London
Copper tubing is seen for sale in Shanghai, China
US manufacturers have attacked plans by JPMorgan Chase to launch an 
exchange-traded fund backed by physical copper, arguing that the product 
would "grossly and artificially inflate prices" and "wreak havoc on the 
US and global economy".
Copper's use in electrical wiring makes it essential to the 
manufacturing industry.

In a letter to the Securities and Exchange Commission, lawyers 
representing the copper consumers say the impact of the ETF on the 
copper market would be comparable to the Sumitomo trading scandal of 
1995-96, which sent prices sharply higher.
JPMorgan is among several groups trying to capitalise on investors' 
interest in industrial metals by launching a fund that allows them to 
access physical copper directly.
Its regulatory filings suggest its ETF could hold 61,800 tonnes, 27 per 
cent of the copper held in the London Metal Exchange's global network of 
warehouses. An ETF proposed by BlackRock iShares could hold 121,200 tonnes.
Groups complaining about the ETF include Southwire, the biggest US 
manufacturer of electrical cable, and Red Kite, a metals-focused hedge 
fund and trader. Bob Bernstein of Vandenberg & Feliu, a law firm acting 
on behalf of the consumers, said he was representing companies that 
account for half of US copper fabrication capacity. In the letter to the 
SEC, they argue the ETF would result in a "substantial artificially 
induced rise in near-term copper prices ... simulating the effects of an 
artificial squeeze or corner being financed by unsuspecting investors in 
JPM's ETF."
Similar products in precious metals, such as gold, silver and palladium, 
have been very successful in recent years. But copper consumers fear 
that allowing investors to hoard physical industrial metals would create 
shortages and drive up prices.
Copper prices have fallen 26 per cent from a peak last year and 
investors are questioning the sustainability of China's growth, which 
has been the principal driver of the market.
Moreover, other ETFs that hold physical copper, launched in the past 18 
months in Europe by ETF Securities and Deutsche Bank, have had limited 
success. The ETF Securities product holds just 3,427 tonnes of copper. 
But bankers believe the products could be more successful in the US, 
where large asset managers have fewer commodities investments available.
The letter is a response to a filing by NYSE Arca, the exchange, to 
allow it to list the ETF. After meeting executives of Southwire and Red 
Kite this month, the SEC will now decide whether to permit the product 
or open a longer period of consultation. The companies declined to comment.