NEW YORK, July 17 U.S. regulators should block
JPMorgan Chase & Co's plan for an exchange-traded fund
(ETF) physically backed by copper because it would create a boom
and bust cycle in the market, according to U.S. Senator Carl
Levin outlined his opposition in a letter to the Securities
and Exchange Commission, arguing the proposed product would
disrupt supply and inflate prices by removing a significant
chunk of material from the market.
"There is ample evidence that if the ETF shares are listed
and traded on the NYSE exchange, the trust will disrupt the
global supply of copper," the Democrat from Michigan said in his
letter dated July 16.
He is the first politician to criticize the JPM XF Physical
Copper Trust, reflecting growing opposition to the product that
has already ignited fears in the physical copper industry about
its potential impact on metal flow and prices.
Levin is also chairman of the permanent subcommittee on
investigations, which has in the past has linked speculation to
higher commodity prices.
The issues he raised in the letter are the same as those
laid out by one of the largest copper users in the United
States, SouthWire, and hedge fund and major physical trader Red
Kite, in a letter to the SEC in May..
Opposition to the product may have complicated the approval
process with the SEC. JP Morgan filed plans to list the fund on
the NYSE Euronext exchange as early as June, almost two years
after it first announced plans to create a copper fund, but
there has been no official announcement since.
A JP Morgan spokesperson declined comment on the letter and
the planned fund launch.
BOOM AND BUST
Fears about the fund center on the hoarding of copper for
the fund, which critics say could lead to higher prices and
leave the market vulnerable to a mass influx of metal if demand
for the product suddenly plunges.
JPM'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
BlackRock Asset Management International Inc has also
proposed a physical ETF, called iShares Copper Trust, which
would use an initial 121,200 tonnes of copper as collateral
against shares in a fund.
Those two products would account for just over a third of
global stocks available for immediate delivery, Levin said.
"This artificial supply and demand pattern is likely to
create a boom and bust cycle, as speculators enter and leave the
market," Levin said.
Precious metal ETFs do not cause the same concerns because
gold, silver, platinum and palladium are treated as currencies
and are held for investment purposes. As a result, substantial
existing supplies can be acquired without affecting the world
price, Levin said.
"It will make the copper market more susceptible to squeezes
and corners by speculators," he said.
NYSE Euronext rebuffed the issues raised by Southwire and
Red Kite in a letter to the SEC dated June 19, noting that the
small size of the fund relative to the global market of 20
million tonnes per year.
The fund is not initially expected to exceed a value of $75
million, which would equate to about 10,185 tonnes, it said.
The fund would only issue more shares, which would require
more copper to be stored as collateral, if there is investor
demand to justify it, the exchange said.
Concerns that the product will cause a bubble that may be
vulnerable to bursting is "speculative and misplaced", the
Redemptions would only drive prices down if the trust was
extremely large relative to the size of the physical copper
market, it said.
ETF Securities launched a copper fund in October 2010, but
it had only amassed investments representing just over 6,000
tonnes as of March, worth about $46 million at today's prices.