UPDATE 1-GAM Holding to launch physically backed base metals funds

Thu Jun 27, 2013 11:10am EDT

* Metals to be stored in Trafigura's warehousing unit

* News likely to stir debate over impact on prices, supplies

* Two copper ETFs planned in U.S.

By Emma Farge and Josephine Mason

GENEVA/NEW YORK, June 27 (Reuters) - Swiss asset manager GAM Holding said on Thursday it plans to launch base metals funds backed by physical aluminium, copper, nickel and zinc stored in Trafigura's warehousing unit.

The JB Industrial Metals Funds will use North European Marine Services (NEMS), a warehousing company owned by commodities trader Trafigura, to store the metals in London Metal Exchange-registered facilities, a Swiss & Global spokeswoman said.

Swiss & Global, a manager for bank Julius Baer and part of GAM, will run the funds. GAM is Switzerland's largest listed asset manager.

GAM's funds will be structured like a physical exchange-traded fund, using metal as collateral against shares in the funds. But unlike ETFs, GAM will not list the shares on an exchange, the spokeswoman said.

News of the plans will likely stir the debate over metals storage and the potential impact of the funds on prices and supplies of critical industrial raw materials used to make cars, electrical wiring and stainless steel.

In the United States, copper fabricators have warned that similar copper funds planned by the world's largest money manager, BlackRock, and Wall Street bank JPMorgan Chase & Co will inflate prices and squeeze supplies by removing a big chunk of metal from the market.

Using NEMS is also significant because NEMS has amassed a big hoard of base metals in Antwerp, Belgium, which is locked up in financing deals and is therefore not available to the market for immediate delivery.

The firm is the largest LME warehouse operator in the port town where stored metal piles have risen by about 170 percent since January to more than 120,000 tonnes.

LME warehousing companies - such as NEMS; Pacorini, which is owned by Glencore; and Metro, which is owned by Goldman Sachs - have been making money by building up stocks and allowing queues to grow for consumers to withdraw materials while charging rent for storage.

That strategy has angered end-users who say they are paying physical prices for metal that are not justified by genuine supply-and-demand fundamentals.

STIFF OPPOSITION FOR OTHER FUNDS

The ETF initiatives proposed by JPMorgan and BlackRock in the United States have proved controversial and have faced stiff opposition.

The U.S. Securities and Exchange Commission has given the go-ahead for them to launch two separate copper ETFs, but copper fabricators are fighting the ruling in the U.S. Court of Appeals in Washington.

JPMorgan would use its Henry Bath warehousing unit and BlackRock would store its metal in Metro.

The new funds are intended to give investors easier access to the metals market without the added costs linked to a market structure known as contango, where forward prices are more expensive than the spot, GAM said.

The timing of the launch is not known.

But the news comes as investors' appetite for base metals has deteriorated due to concerns that demand from China, the world's biggest copper consumer, will slow.

LME three-month copper prices hit $6,602 per tonne on Tuesday, their lowest level since July 2010 and down a third from the peaks close to $10,000 reached in February 2011.

The new JB funds will compete against ETF Securities, which has launched its own physically backed funds for copper, zinc, nickel, tin, aluminium and lead over the past three years.

ETF Securities' copper fund has amassed investments representing just under 4,000 tonnes of metal worth about $34 million at today's prices, while its aluminium fund has just 270 tonnes of metal as collateral worth just under $500,000.

That compares with about 31 million ounces of gold - worth $40 billion - held in the largest gold-backed ETF.

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