Base Metal ETFs One Step Closer to Launch Impact on Industrial Metal Buying Organizations

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Not one week ago did we interview Will Rhind, Head of US Operations for ETF Securities when we asked a simple question, “What are the prospects for a base metal ETF for aluminum and copper? Will answered simply, “no comment. But that was October 7 and today is October 12 and not too surprisingly, ETF Securities has announced it plans to launch exchange traded products that will have the physical backing of a range of base metals according to at least two reports one from Barron’s and the other from Reuters. The base metals include copper, aluminum, zinc, lead and nickel. The funds will require regulatory approval and therefore have not officially launched, though arguably they have taken one step closer.

The announcement will undoubtedly send ripples and waves throughout the base metal industrial buying community because unlike many of the ECN’s (Exchange Traded Notes) or what we would call “synthetic products currently available on the market, the new funds will have the backing of the physical metals. Some of the metals currently in LME inventory, particularly aluminum would likely serve as the foundation for a physically backed aluminum ETF. As we previously reported, a physically backed fund (unlike a synthetic product) offers a hard asset class to investors. Once the funds launch, we would expect prices for base metals to rise. And this will have a large impact on industrial metal buying organizations.

But one limiting factor necessary for a successful physically backed ETF involves having the requisite “inventory. Though ETF Securities included copper in their announcement, without a stockpile of inventory available, growing a fund similar to what ETF Securities has done with gold may prove challenging. Take a look at inventory levels across several of the base metals comprising the ETF Securities announcement:

Copper –

Aluminum –

Zinc –

Lead –

Nickel –

If we were to bet on the order of launch we would speculate that those base metals with higher inventories would come first. Our order would likely look like aluminum,   followed by a zinc, then a lead ETF. Copper and nickel, due to declining inventories may prove more challenging.

See our previous coverage of explanations of the impact of ETFs on metal markets:

Precious Metals and Other Base Metal ETFs

The Rise of Precious Metal ETFs and Lessons for Broader Industrial Metals Markets

Why Gold is Not a Bubble Market

We have suggested to all base metal buying organizations that they keep close tabs on developments involving ETF funds. Though we assumed Glencore or Credit-Suisse might serve as the first to launch a base metal ETF, these funds from ETF Securities combined with the support of Deutsche Bank may actually come first. They will alter the sourcing landscape…

–Lisa Reisman

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