JPMorgan’s foray into the copper market in 2010 was of similar size to this combined figure we broke down in Part One, and it caused copper prices to spike.
These ETFs would likely grow more slowly than the 2010 venture, so it’s possible prices wouldn’t spike, but a physical delivery premium or rise in the prompt price is a more subtle manifestation of supply tightening and harder to pin on any single cause.
The banks may claim that with the copper market moving into surplus, the effects will be muted at best; indeed, producers may even welcome such a development, absorbing excess production as aluminum smelters have undoubtedly benefitted from the activities of major traders, banks and warehouse firms whose combined activities have locked up millions of tons of unwanted primary aluminum and provided welcome physical delivery premiums – welcome to producers, not to consumers, who have undoubtedly paid more for their aluminum as a result.
Supporters of physically backed ETFs may also argue that there is no premium for prompt delivery of precious metals for which physically backed versions of PGM ETFs exist, so why should there be for copper?
But that’s missing the point.
The players in the new copper ETF market are the very same ones who have so successfully manipulated the aluminum market, the same who own and control the warehouses in which the material will be stored. This isn’t a question of ‘do we want these physically backed copper products?’ or not – we’ve got them whether we like it or not – but consumers beware: a new dynamic has been introduced into the market, maybe fortunately, at a time of emerging excess supply.
But let’s learn from reviews of what has been happening in the aluminum market. There may be lessons there for future regulation of the physically backed ETF market.