NEW YORK 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.
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 tonne.
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 letter said.
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. (Reporting by Josephine Mason; editing by Jim Marshall)