Last year we wrote about plans to launch physical metal backed Electronic Traded Commodity Funds led by Canada’s ScotiaMocatta, a unit of Bank of Nova Scotia, Copper Fund. As Andy Home in a Reuters article said, the fund was to be the first of its kind, offering an ETF backed with physical copper. The template has worked extraordinarily well in the precious metals sector, so much so that the SPDR Gold Trust fund is the world’s sixth-largest holder of physical gold. ETFs have facilitated and accentuated retail investor interest in gold, becoming a major fundamental driver in their own right. The same was hoped and expected for copper, and if it worked for copper the argument went why not aluminum or nickel? All metals play a role as a store of value in times of volatility, admittedly precious metals more than any but copper has enjoyed dramatic price appreciation because it is considered a bell-weather for the global recovery, as a measure of emerging market demand. Well therein lies the problem, ScotiaMocatta’s Copper ETF has been pulled prior to launch, and for the second time.
The reason is simply in spite of the enormous wall of money that has gone into speculative metals investments ScotiaMocatta could not raise the C$100 million necessary to meet the funds minimum threshold. According to the article, investors have been put off by the short-term outlook for copper but as Andy Home says although that could be the case today it wasn’t 2 or 3 months ago. Where were all the copper bulls? The suggestion is it has more to do with the fundamental shortcomings of the physically backed ETF model, namely that the fund has to find, store and insure the metal. That is not an impediment for gold or other precious metals. The metal is not in short supply, the value is so high that storage and insurance costs per ton are low, so the maintenance costs of the fund are low. Copper, on the other hand, if purchased via the LME could be for a warrant anywhere in the world. For delivery in a specific location, say Rotterdam there is a cost premium. Then LME approved warehouses (stated in the prospectus as the intended store) are expensive compared to external commercial warehouses. The costs mount, eating into potential returns. When viewed in this way, the potential for copper and nickel physically backed ETF’s looks less attractive in anything other than a raging bull market.
However the other metal that was mooted as a candidate for a possible physically backed ETF was aluminum. Glencore, Credit Suisse and even producer UC Rusal have talked about launching such a fund. Aluminum is already held in vast quantities probably in excess of 3 million tons in long-term financing deals so low cost storage (disused airfields have been rumored as one location) is already available. Large volumes of metal are readily available from the finance deals so material in one location could be rolled into an ETF on maturity. Indeed the financiers of those long-term deals could be the early clients of the ETF’s swapping one instrument for another. Andy Homes’ analysis makes interesting reading. The copper backed ETF may be dead for now but the aluminum backed ETF could still be alive and well.