NEW YORK, July 19 U.S. copper fabricators have ratcheted up their opposition to the copper exchanged-traded funds (ETF) planned by JPMorgan Chase & Co and BlackRock Inc ahead of a key ruling by the Securities and Exchange Commission on Thursday.
Lawyers representing Southwire Co, Encore Wire Corp , Luvata and AmRod and major hedge fund and physical trader Red Kite sent the SEC a letter dated July 18 and seen by Reuters, calling on the regulator to block BlackRock's proposal.
The letter said those copper fabricators, who account for half their industry's U.S. capacity, believe competing with the funds would force them to pay higher prices for their raw materials. A fund could also make the market more volatile, making fabricators vulnerable to a price collapse.
"The risks associated with the removal of so much copper could have potentially devastating effects not just on potential investors in the shares, which should be a concern to the SEC, but also on existing and future investors in industries that depend on copper for their primary feedstock," said the letter from attorneys at Vandenberg & Feliu LLP.
Vandenberg & Feliu LLP is representing the same group in its opposition to the JPMorgan Chase product.
Criticism of these products has increased ahead of the July 19 deadline for the SEC to rule on JPMorgan's XF Physical Copper Trust. U.S. Senator Carl Levin warned this week it would create a boom-and-bust cycle in the market
The July 18 letter from fabricators said copper stored by the ETFs would represent some 63 percent of London Metal Exchange (LME) and COMEX stocks in the United States and would lead to inflated prices and a disruption in supply and flow of metal.
The SEC will decide on Thursday whether to extend the consultation period by another 45 days or give its approval for NYSE Arca to list the first such U.S. product on its exchange.
JPMorgan filed its first SEC documents to launch the fund in October 2010. If it gets approval, the U.S. bank would need to file a final registration document with the SEC before it can start marketing and selling the product.
A spokesperson for JPMorgan did not respond to requests for comment. BlackRock declined to comment due to a regulatory quiet period.
Opponents of the funds have focused on the impact on North American end users because most of the 180,000 tonnes of metal which will be used as physical collateral against the shares in the two funds will likely be bought in the United States, where the metal is cheapest.
JPMorgan's first filing said the fund would store LME brand-approved copper valued at up to $499,761,150 - equivalent to roughly 62,000 tonnes based on a copper price of $8,000 a tonne.
BlackRock has proposed a physical ETF to be run by its BlackRock Asset Management International unit and called iShares Copper Trust, which would use up to 121,200 tonnes of copper as collateral against shares in a fund.
Those tonnages combined are insignificant in a 20 million tonne global market, but they have worried U.S. fabricators, who are the main end users of the red metal, because it accounts for the majority of metal available in U.S.-based exchange-bonded warehouses.
Fabricators rely on annual contracts for most of their supply of raw material, but they may have to increase purchases if there is a pick-up in demand should the economy improve, the letter states.
That metal would likely come from exchanged-registered warehouses, which may not be available if the funds are given the green light.
The NYSE Arca has defended JPM's plans saying concerns it will cause a bubble that may be vulnerable to bursting is "speculative and misplaced", noting the small size of the funds' collateral relative to the global market.
JPMorgan is expected to launch its fund with an initial value of $75 million, representing just over 10,000 tonnes, and will only build up stock if there is demand for the product, NYSE Arca has said in response to the fabricators' concerns, it has said.