Europe Markets

Copper ETF Plan Would ‘Wreak Havoc’

Jack Farchy in London

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”.

Reel of uninsulated copper wire
Charles D Winters | Photo Researchers | Getty Images

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 percent 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.