U.S. copper user, trader attack JP Morgan ETF plan
* Red Kite, Southwire executives met SEC last week
* ETF would be comparable to Sumitomo price fixing scandal - lawyers
* Fund would "wreak havoc on U.S. and global economy" - letter
By Josephine Mason
NEW YORK, May 23 (Reuters) - A major U.S. copper consumer and a trader have lodged the first public opposition to JPMorgan Chase & Co's plan to launch a exchange-traded fund (EFT) physically backed by copper, comparing its impact to the Sumitomo scandal in the 1990s.
Lawyers representing Southwire, one of the largest copper users in the United States, and Red Kite, a major metals hedge fund and physical trader, argued in a letter to the U.S. Securities and Exchange Commission (SEC) this month that such a fund would inflate prices and squeeze supply by removing as much as a third of the London Metal Exchange's copper stocks.
Inflating prices for an industrial commodity already in short supply would "wreak havoc on the U.S. and global economy", according to a letter from attorneys at Vandenberg & Feliu LLP, dated May 9.
While it is the first formal criticism of the JPM XF Physical Copper Trust, the letter reflects widespread industry concerns that have complicated the fund's regulatory review. It came just weeks after 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.
The letter equated the fund to the Sumitomo trading scandal in 1995, saying that the exchange would be "facilitating the fixing of prices" by allowing investors to underwrite the costs of holding physical copper off-market and in storage to drive up prices. The letter was first reported by the Financial Times.
The Sumitomo affair, which was at the time the largest trader fraud ever, involved the firm's copper trader Yasuo Hamanaka who built up a dominant position in the copper market and cost the Japanese trading house and the market billions of dollars.
There is no suggestion that the ETF would be fraudulent.
Senior executives from the two firms met with the SEC last week to voice their opposition to the plan, according to a separate filing.
A JP Morgan spokesperson did not immediately respond to a request for comment on the letter and the planned fund launch.
Net short sellers on the London Metal Exchange (LME) who need the physical commodity to close out their positions would be forced to pay higher prices, while manufacturers and fabricators who rely on LME inventory for supply would also pay more and pass on the extra costs to consumers, the letter said.
JPM's first filing said the fund would store LME brand-approved copper valued at $499,761,150 - equivalent to roughly 62,000 tonnes based on a copper price of $8,000 a tonne.
That equates to more than 30 percent of LME stocks from global annual output of 18 million tonnes.
Removing that material from the market would squeeze supply hardest in the United States, where physical premiums - the payments made on top of the benchmark copper price for delivery of the metal in cathode form - are cheapest, the letter said.
As a result, the bank would likely acquire most, if not all of its supply from the U.S., which is a net importer of copper and therefore in greater need of material than other regions.
Market participants have said there are flaws in the plan, questioning whether investors would be willing to pay fees to buy into the fund. With the price of copper for immediate delivery higher than prices for future delivery, many have questioned whether investors would be willing to watch their investment lose value.
JPM is not the only company planning a copper ETF. 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 $50 million at today's prices. BlackRock lodged its prospectus around the same time, with plans to use 120,000 tonnes of LME-grade copper as collateral.
Similar products in the precious metals market have not raised the same concerns because they are larger markets with a greater flow of metal.
- U.S. Mega Millions lottery up to $400 million, 2nd-biggest ever
- Pope Francis named Time's Person of the Year |
- Uruguay becomes first country to legalize marijuana trade
- Thousands of South Africans line up to see Mandela lie in state |
- China bitcoin arbitrage ends as traders work around capital controls