As 2012 drew to a close, the SEC finally approved J.P.
Morgans JPM XF Physical Copper Trust, the first
exchange-traded product for physical copper in the U.S. At the
same time, the SEC delayed its decision on a very similar
Copper Trust from BlackRocks iShares until February
Its been a very long process, starting in October
2010, when both JPM and BlackRock filed their original
applications with the SEC. Back then, copper was in the first
year of what became a three-year-long deficit, with demand
exceeding supply, but now the market may be swinging into a
That leads to the question: While JPM and BlackRock were
battling it out with a very dedicated group of opponents
a group of copper fabricators who fear the investment products
will engage in hoarding intending to drive prices artificially
higher did they miss the right moment for a launch?
And with plenty of futures-based copper ETFs on the market,
will investors be willing to take on the additional costs of
storing and insuring physical copper, which is big and bulky
unlike gold, silver, platinum and palladium?
There is currently only one physical copper exchange-traded
product in the world, offered by ETF Securities of London.
Launched in December 2010, the firms physical copper
product (PHCU.LN) has barely gotten off the ground, with just
$16.2 million in assets as of January 15, according to
Bloomberg. By comparison, their futures-based copper product
(COPA.LN), launched in September 2006, had a healthy $507.9
million in assets on the same date.
When it comes to comparing the two ETFs on returns, the
picture is mixed and depends on many market variables, but
right now things seem to favor the futures-based copper ETF.
COPA, for example, had the better one-year return with -2.15
percent versus -2.91 percent on PHCU as of January 15,
according to Bloomberg. And the physical product has also been
handicapped by its high costs, including 41 cents per ton per
day to store the metal, an expense ratio of 69 basis points and
another 12 basis points for insurance. That brings the total
cost to an investor to about 2.5 percent, says Ben Johnson, the
director of passive-fund research at Morningstar in Chicago. By
comparison, investors in the futures-based product pay just an
expense ratio of 49 basis points, he notes.
Futures-based products wont always have a cost
advantage. When the futures market is in contango, a situation
that occurs when the near-month contract is cheaper than those
expiring further out, the ETF has to roll its
expiring contracts by selling low and buying high, which can be
costly. Still, it is a small wonder that ETF Securities
U.S. subsidiary does not seem to be pressing its case with a
basket of six physical industrial metal trusts, including
copper, which it filed with the SEC in February of 2011. The
public record on the SEC site shows no activity since April of
2011, when ETFS filed its first and only amendment. A company
spokesman declined to comment.
Copper is a huge global market, and whether all of the
moving parts will combine to produce a surplus this year is
still up for debate, but theres no question that the
prolonged deficit has led to greater efforts to mine copper.
The bigger question seems to be whether demand will also
Last October the International Copper Study Group, a Lisbon,
Portugalbased industry organization, predicted that the
market in 2013 would be in surplus by about 400,000 metric tons
a relatively small amount in the context of a global
market that the group believes will grow to 21.19 million
metric tons next year.
Taking a longer view, in a January 4 report on the 2013
outlook for base metals, Fitch Ratings said, Additional
mine production of about 1 million t [tons] is expected in 2013
and 2014, citing new projects in Africas copper
belt, ramped-up production at existing mines and the end of
disruptions such as labor strikes. But Fitch also cautions,
Should new supply disappoint while recovery in the
industrialized nations strengthens, deficits could persist,
requiring higher prices to clear the market.
On the demand side of the equation, China accounts for a
disproportionate amount of global demand 42.5 percent
during the first half of 2012, according to the copper study
Martin Arnold, head of research for ETF Securities in
London, notes that Chinas state metals organization has
predicted that Chinese copper demand will rise by more than 5
percent this year. In December Chinese stockpiles were the
highest they had been in about seven months, and consequently
Chinese copper imports had dropped sharply. But, he adds,
Additional stimulus programs could prompt a Chinese
deficit in 2013, which is likely to result in a tighter global
market as imports rise.
On January 15 three-month copper at the London Metal
Exchange closed at $8,080 per metric ton, up from $7,994 on
A spokeswoman for NYSE Arca says that no launch date has
been set for JPMs Copper Trust. She points out that
technically, the copper trusts are not ETFs but ETVs, or
exchange-traded vehicles, because they will hold the physical
commodity. Nevertheless, they will trade side-by-side with the
futures-based copper ETFs.
If they get there, that is. Robert Bernstein, the New York
City lawyer representing the copper fabricators, isnt
ready to throw in the towel. He says he has filed a Freedom of
Information request with the SEC to find out how each of the
commissioners voted on the JPM product. And he says he may file
an appeal in federal court, challenging the SECs
conclusion that the JPM product would have no negative
impact on the relatively small market for copper available for
immediate delivery represented by copper on warrant in LME
warehouses, he said in an email.