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ETF Backed by Copper

iShares Copper Trust Approved by SEC

Written by Joseph Cafariello
Posted March 4, 2013 at 6:30PM

Could copper prices be set for a multi-year bull run? It could very well be the case now that two new copper-based ETFs will soon come to the market.

If you invest in copper or have been wanting to—if only there were an affordable way of doing so—you are really going to like this…

IndexUniverse announced:

“The Securities and Exchange Commission has finally given its stamp of approval to the iShares Copper Trust, a physically backed exchange-traded fund that has been in the regulatory pipeline for over two years.”

This follows the SEC’s approval of another copper ETF—The JP Morgan XF Physical Copper Trust—approved this past December.

Both of these ETFs will be physically-backed, meaning they will hold the actual copper metal. There also exists another copper ETF—United States Copper Index Fund (NYSEArca: CPER)—which is futures-backed, not physically-backed.

Now, if you are an industrial user of copper, perhaps a construction related company, chances are you are grinding your teeth at this news, as these two ETF hoarders of the metal could potentially disrupt the copper marketplace by adding premium to the price.

At least that’s the fear, as Bloomberg explains:

“A group of industrial copper consumers including AmRod Corp., Southwire Co. and Encore Wire Corp. (WIRE) have opposed plans for copper ETF’s, saying funds backed by copper would leave less of the metal available for manufacturers, creating shortages and driving up prices.”

But the SEC believes otherwise, stating, “Given the structure of the trust, the Commission believes that the amount of copper accessible to industrial users will not meaningfully change as a result of the listing and trading of the shares,” as quoted by IndexUniverse.

Because physically-backed ETFs are trusts, they respond to the buy and sell requests of their shareholders and will increase or decrease their holdings accordingly. Trusts are not holding companies that can simply buy the underlying commodity and hold on to it at will. Thus, hoarding is not possible with a trust, since the trust does not make its own trading decisions.

As the SEC previously stated following its approval of JP Morgan’s copper fund, “The Sponsor believes that the trust would move copper from one type of liquid stock to another type of liquid stock, rather than removing inventory from the market, and would track, rather than drive, copper prices,” IndexUniverse cited.

In other words, the only thing these ETFs do is redirect investments from copper futures to copper trusts, out of one warehouse and into another. Any investor can hoard of his or her own accord, but ETFs are not the cause. They would merely be just another place of storage.

The SEC even conducted its own research into the premise that ETFs distort their respective marketplaces. “Citing research it did with gold, silver, platinum and palladium ETFs,” IndexUniverse informs, “the SEC argued that it found no ‘observable’ relation between asset flows into these ETFs and subsequent price changes of the underlying metals.”

Copper is one of the most abundant metals on Earth. If gold ETFs have not enabled the manipulation of the gold price in a market that is vastly smaller in supply than copper’s, then a couple of copper ETFs will not be able to corner the copper market.

But since these ETFs will make copper investing easier and more affordable, it is inevitable that some new money will make it into copper ETFs that would not otherwise be invested in its futures. So, yes, these trusts will contribute to some increase in copper prices during buying frenzies, as the trusts would be required to purchase more copper on the market and store it in their vaults in response to their shareholders’ demand.

But the reverse would happen during copper sell-offs. As investors dump their copper ETF shares, the trusts would sell their copper inventory back into the marketplace, the added supply of which would accelerate an already falling copper price. I can’t see industrial copper users or construction-related companies complaining when that happens.

As Bloomberg recently pointed out:

“Global demand will expand 3.4 percent to 20.85 million tons [in 2013], from a 1.5 percent gain in 2012, Barclays estimates. Supply will climb 3.5 percent to an all-time high of 20.83 million tons. While that means an annual shortage of 19,000 tons, it’s driven by the projected first-half deficit, compared with a surplus of 297,000 tons in the second six months.”

With JP Morgan’s fund looking to hold some 61,000 metric tons, if the i-Shares fund holds the same, their combined inventory of some 120,000 tons would equal 2.1 days’ worth of new copper supply making it to market in 2013. That’s right, 2.1 days of supply tied up in ETF vaults. You can’t disrupt the marketplace with just that.

In the meantime, the copper market will benefit greatly from the addition of these two funds, from copper miners and producers who now have another source of copper demand to the average investor who now has an affordable copper investment vehicle—and yes, even to industrial copper users, if they avail themselves of this new instrument and learn to use it to their advantage.

Joseph Cafariello

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