Could Physical Metal ETFs Screw With Industrial Copper Buyers?

hindustan copper stacks and worker

Continued from Part One.

Copper ETFs and the Futures Market

It should not be overlooked that there are products in the ETF market that allow investors to gain exposure to copper prices via the futures market.

In 2007, the first futures-based, exchange-traded note was approved; the DJ-UBS Copper Total Return ETN (exchange-traded note), which tracks an index that reflects copper futures contracts. That product has had modest success, attracting more than $100 million in assets under management.

But since then, two other futures-based, exchange-traded products – the Pure Beta Copper ETN and the US Copper ETF – have attracted only a few million dollars each. Futures-based ETFs, though, do face problems of rolling losses and fees that dilute the returns.

A physically backed product could avoid these, although it will still face storage and insurance costs, which will translate as fees that will inevitably come out of returns.

What This Means For Copper Buyers

We have some sympathy with consumers fearful of the impact physically backed products could have on the market.

Financial involvement has distorted the aluminum market so badly that there are officially some 5 million tons and potentially twice that sitting isolated from the market in park-and-ride finance deals.

The resulting competition for metal has created premiums for primary ingot over and above the LME price, premiums that are now finding their way through to consumers of extrusions and rolled products as additional costs being passed on by the mills.

It wasn’t ETFs that caused such distortions in the aluminum market, but it could be ETFs that start the ball rolling in copper.

One Comment

  • Mightn’t the ETFs actually help the situation? Right now the only supplier of last resort is an exchange wharehouse which is subject to daily discharge/cue rules that are manipulated by warehouse operators, traders, large participants and banks to distort the market. Having an alternate repository for metallics that has an independent set of rules should dilute the impact of these manipulations on the LME. I believe that there are provisions to exchange shares for underlying collateral in the proposed copper ETFs.


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