Physically Backed Copper ETFs Will Continue Pushing Up Investor Interest

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In our coverage of physically backed industrial metal ETFs and how they impact the industrial metals markets, we’ve read a lot of things about the potential effects but only yesterday did we hear the most distilled sentiment about the physical copper ETF yet:

“Useful copper is a refrigerator in India that means more people have access to food. Useless copper is sitting in a wheelbarrow in someone’s basement.

This from Justin Roux, vice president of communications for Luvata, who spoke to Camila Reed of Reuters (who also chatted with Andy Home, Metals Insider’s columnist) in a recent video interview on physical metal ETFs.

The proverbial basement he refers to, as it were, belongs so far only to ETF Securities which has launched several physical base metal ETPs in Europe but soon could multiply into a few more. (As the argument goes, one potential effect of ETFs is that they will hold copper, aluminum and other industrial metals back from the market and prevent producers from an accessible-enough supply.)

Upcoming Physical Copper ETF Players

There are three new offerings in the works, from BlackRock and JPMorgan for copper, and from Credit Suisse for aluminum. Until we actually see those released, Home said, it will be very hard to tell what the cumulative market effect will be, and especially how “dangerous they will be to the traditional user.

For the suppliers and manufacturers that rely on physical copper for their “useful products, as Roux put it, these funds could put a wrench in their gears, price-wise; especially because BlackRock, the parent firm of iShares the largest US ETF issuer not to mention JPMorgan, ply much broader global waters. In other words, these players have the ability to touch several markets beyond the London Stock Exchange.

For example, ETF Securities currently holds about 3,500 tons of copper, which is neither tiny nor huge. BlackRock and JPMorgan, however, put investment interest at $1 billion and $500 million, respectively, according to their prospectuses. At today’s LME cash prices for copper, that represents between 55,000 and 110,000 tons. Previous reports had estimated the firms would buy up a combined tonnage of around 182,800 tons. Roux estimated 180,000 to 300,000 tons could be taken off the market.

Backwardation a Concern

Another issue is what physical copper ETFs will do to the forward price curve. The danger of steeper backwardation (the spot price being higher than the futures price) exists the more a market is in deficit as copper will certainly be in the months/years to come, according to commentary made in the video. Home contends that it’s actually a bad investment strategy to hold physical metal in a backwardated market because you’re giving up your positive roll yield month-to-month.

As far as the different non-ferrous metals are concerned, however, copper is definitely the one to keep an eye on, as it will have the highest investor interest through the year and into 2012. Perhaps all the more reason to consider substituting copper with aluminum?

–Taras Berezowsky

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