Physically Backed Copper ETFs Now a Focus in LME Warehouse Scheme

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My colleague Lisa Reisman wrote an excellent piece this week concerning a potential CFTC probe into the activities of the major banks and traders involved in the physical warehousing of aluminum for the LME and the assertion that slow load-out rates have adversely impacted the market price – an issue we have been banging on about at MetalMiner for a year or more.

Well, a footnote to an interesting article in the NY Times on the topic raises what may be the next scam – er, sorry; opportunity – the major banks and traders are bringing to the marketplace, which is physically backed copper ETFs.

The news itself is nothing new: JPMorgan applied as far back as 2010 for approval to operate such a fund, as did BlackRock and Goldman Sachs (the players sound familiar?).The industry, at least in the form of consumers, reacted angrily, saying it risked distorting the market, but the SEC disagreed and last December gave its approval.

The consumer’s worry is that removing metal from physical supply by locking it up in warehouses to back the ETFs would reduce the physical supply available to consumers and create an artificial premium for prompt delivery – which sounds remarkably like what has been happening on the aluminum market for the last few years.

The banks and traders contend that the funds will just track the market, not distort it, but that’s being somewhat disingenuous. Back in 2010, JPMorgan quietly embarked on a huge buying spree in the copper market, the NY Times reported. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange, the article said.

Copper prices spiked in response. Today, there are some 632,000 tons of copper on the LME, according to the latest LME stats. Earlier this year, the Wall Street Journal reported details of the regulatory filing approving BlackRock’s copper ETF, saying it was expected to hold about 121,200 metric tons of copper, twice the size of JP Morgan’s ETF, which would initially hold about 61,800 tons.

Combined, that’s some 183,000 tons, assuming they didn’t grow beyond those levels and assuming no one else jumped on the bandwagon and started similar funds.

Continued in Part Two.

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