A huge opportunity for copper investing in 2013 could be on the market soon – that is, unless half of the "red metal" industry gets its way.
A group of copper consumers is accusing the U.S. Securities and Exchange Commission (SEC) of being "arbitrary and capricious" when last month it approved the JPMorgan XF Physical Copper Trust, the first-ever U.S. copper exchange-traded fund (ETF) backed by the metal itself. The fund had a two-year wait for the green light.
The trust initially plans to hold 61,800 metric tons of copper in warehouses worldwide. That is equivalent to about 27% of the copper held in London Metal Exchange's (LME) global network of warehouses.
This strategy of holding physical metal is similar to many of the precious metals ETFs on the market, such as the SPDR Gold Trust (NYSE: GLD).
But now many in the copper industry, including fabricators who account for about half of U.S. copper demand, claim the SEC had insufficient evidence to conclude the product would not affect the metal's supply, according to the Financial Times.
The group says the fund would "obviously drive up the price of copper available for immediate delivery and create shortages of such supply," and would remove as much as 30% of the copper available for immediate delivery.
Sen. Carl Levin, D-MI, also disapproved, saying it would be a "blow to American businesses and consumers" and "allow speculators to create a squeeze on the market."
But the SEC disagrees.
The Case for Copper ETFs
The SEC ruled that the ETF would serve as a transparent and accessible alternative by which participants in the copper market can access or offload physical copper inventory and associated price risk. The SEC believes the ETF will track the copper price, not drive it.
The SEC said in its decision that the copper held in the trust would not necessarily be unavailable for immediate delivery, nor would it need to acquire a large amount of copper in a short period of time, limiting what's available to the rest of the industry.
Such copper ETFs already exist in Europe – from ETF Securities and Deutsche Bank – and have not disrupted the market.
According to company data from ETF Securities, its copper fund holds about 2,000 metric tons of the metal. That's compared with more than 20 million tons of copper mined and used in 2012, according to International Copper Study Group (ICSG).
While the JPM ETF plans to hold more than 2,000 metric tons, it's still only using about 0.3% of the total copper produced in 2012.
In addition, the JPMorgan ETF will not be able to hoard copper. So said United States Commodity Funds' CIO John Hyland in an interview with Index Universe.
"Every institutional player in copper can buy copper, store it in an LME warehouse, or store it in a non-LME warehouse, and refuse to sell it to anybody else, no matter what happens to the price," Hyland said. "That is how that market works. That is how basically all commodities work. You just hold onto it if you want, except for the proposed physical copper ETF. [The fund] would be the only participant who cannot hoard copper."
Hyland went on to say he believes that physical copper ETFs would actually increase liquidity in the copper market because investors could trade the ETF.
More Copper ETFs for Investing in 2013?
If approval from the SEC stands, it means there's hope for another ETF that has been sidelined for two years – the iShares Physical Copper ETF.
The SEC is reviewing the proposal until Feb. 22. The iShares Copper Trust plans to hold many more tons of copper than the JPM ETF, at 121,200 metric tons.
ETF Securities is also planning a physical copper ETF this year.
If investors cannot wait to see if the physical copper ETFs to hit the market in 2013, the United States Copper Index Fund ETV (NYSE: CPER) is a good alternative. This investment vehicle holds copper futures traded on the CME. It's up 2.4% this year.
Other ETFs that benefit from higher copper prices include two ETFs that contain a basket of copper-producing companies stocks. The ETFs are the First Trust ISE Global Copper Index Fund (Nasdaq: CU) and the Global X Copper Miners ETF (NYSE: COPX).
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