Putting the Copper, Tin and Nickel ETF Hype to Bed For Now

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We don’t really want to beat the whole ‘base metals ETF’ thing to death much more than the next guy (rare earths coverage, anyone?), but it seems fitting to do sort of a “wrap-up post on how last Friday’s opening of copper, tin and nickel ETPs by ETF Securities went. At least, we can gauge analysts’ reactions to the opening and their expectations for the 2011 aluminum, zinc and lead offerings.

Can the initial trading activity and sentiment tell us anything about the health of future base metal stocks and supply? With a couple trading days behind us, leaving the dust to settle a bit, here are some indicators and viewpoints on where prices especially those for copper are headed.

As a partial answer to a question I posed in my last post on this topic, Deutsche Bank said back in October that physically backed copper ETPs could hold 300,000 to 400,000 metric tons of metal, according to a Reuters article. “That compares with stocks of about 350,000 tonnes in London Metal Exchange warehouses now, the article continued. Meaning, the amount tied up in ETFs will about equal what’s now available, exacerbating the supply tightness rather than alleviating it.

“The next couple of weeks will be very interesting to see what the level of interest is, said David Wilson, analyst at Societe Generale, quoted in the article. “You do wonder if investors may wait until the bigger players’ products are launched. Two of those bigger players are JP Morgan and Black Rock Asset Management, whose ETP launches are reportedly in the works.

Copper is clearly hotter right now than the other two base metals. The nickel ETP was unchanged from the open, and the tin ETP was left untraded on Friday, according to Reuters. In a Q&A published by Reuters’ Metals Insider, Luvata’s head of metals for Europe and Asia, Ian Scarlett, expressed concern for copper especially. “We’re in a period in which availability is challenged, he said. “Anything that ties up physical metal and restricts end users from using copper is unhealthy.

Kevin Norrish, the managing director of commodities research at Barclays Capital, provides a helpful line of reasoning from the investors’ viewpoint in a Financial Times article:

“In current copper market conditions, investors get a return boost from the futures market as it has gone into backwardation, meaning new contracts cost less than expiring contracts. Investors buying into the physically backed product will not enjoy that uplift. It is a contradiction at the heart of the new products that their existence could lead to tighter market conditions, resulting in ongoing backwardation, to the benefit of investors in futures, Norrish says. On the other hand, if spot market prices go down, and futures markets go into contango (new contracts cost more than expiring ones), investors in physical products will still lose out because the cost of warehousing will go up (because the fee is per ton of metal).

Ultimately, Norrish says in the article: “You can’t argue that physical market investment doesn’t have an impact on price.

–Taras Berezowsky

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