By Andy Home
LONDON Dec 5 Looking at the historical performance of ETF
Securities' physically backed copper fund, you might wonder why the proposed
launch of two more is generating so much opposition among copper fabricators.
The UK specialist in exchange-traded funds (ETF) was the first to extend
what is now a major precious metals investment product into the base metals
It launched three ETFs backed by physical metal - copper, nickel and tin -
in December 2010. In May 2011 the suite was extended to the other three base
metals traded on the London Metal Exchange (LME): aluminium, lead and zinc.
Between them, the six products currently hold 3,179 tonnes of LME-registered
Copper accounts for 1,950 tonnes of that total.
It has always been the most successful of the six in terms of metal held,
which with this sort of fund reflects the amount of money invested.
That shouldn't be surprising since copper has long enjoyed the highest
investor profile among all the LME-traded metals.
"Dr Copper" has historically been viewed as an investment surrogate for the
world's manufacturing sector, thanks to its usage across a wide spectrum of
Yet the current holding is only a fraction of the 249,025 tonnes of metal
sitting in the LME warehouse system.
And even at its peak, 6,875 tonnes over the March-April 2012 period, it
still amounted to only a fraction of LME stocks, let alone global stocks.
So why all the fuss about JP Morgan's Physical Copper Trust and
Blackrock's iShares Copper Trust?
Link to the SEC report:Link to ETF Securities' physical copper ETF page, with holdings of LME metals:***********************************************************
APPLES AND PEARS?
The U.S. Securities and Exchange Commission (SEC) has been charged with
answering that question before it signs off on the products' launch.
Its conclusion came in two parts.
The first, highly counter-intuitive, was that there was no statistical
correlation between LME stocks of copper and price, although there was between
what the SEC termed as "total" copper stocks and price.
That conclusion was based on oversimplistic analysis and an inability to
factor in the most important "total" stocks development of the last few years -
the gravitation of free copper units towards Shanghai's bonded warehouse zone.
The second conclusion was that there has been no correlation between
investment flows into other metal-backed ETFs and the price of those metals.
The SEC used the same regression analysis as performed on the LME
price/stocks relationship, looking for statistical linkage between asset flows
into the most successful ETFs and subsequent price changes in the underlying
The problem, of course, is that the most successful physical ETFs have all
been in the precious metals sector.
Gold, silver, platinum and palladium attracted investors' attention long
before the launch of retail-oriented ETFs in the 1990s. Indeed, gold has
arguably done so since the dawn of time, or at least since mankind first worked
out how to extract the stuff.
None, not even platinum and palladium with their linkage to the automotive
sector, can be said to be an industrial metal on the scale of copper.
Physical precious metals ETFs may have facilitated greater investment flows
from "the man in the street" but may in part only have shifted existing investor
appetite away from traditional products such as bars, coins and jewellery.
Comparing investment influence on price between precious metals and an
industrial metal such as copper seems a classic case of comparing "apples with
Well at least the SEC had one industrial metal ETF it could look at: ETF
Securities' physical copper fund.
Which brings us back to the question above. With just 1,950 tonnes of
physical copper removed from the market, what's all the fuss about?
FUNDS OF A DIFFERENT KIND?
The fuss is all about the proposed size of the two funds.
JP Morgan's application envisages a fund holding up to 60,000 tonnes.
Blackrock's iShares application, registered just days later in 2010, outdid that
with a potential size of 120,000 tonnes.
There's more than a hint of one-upmanship going on in these listings,
particularly Blackrock's neat "I'll double that" proposition.
But the key question here is, what makes these two companies think that
their products are going to be any more successful than ETF Securities' London
If it's just machismo, then copper fabricators probably have little to worry
But could it be that JP Morgan and Blackrock are targeting a completely
different sort of investor?
The proposed size of each fund suggests so.
So does the fact that neither is following ETF Securities in offering a
spectrum of copper ETFs. Its physically backed copper fund is complemented by a
(long) Copper ETF, a Short Copper ETF and a Leveraged Copper ETF, all based on
the DJ-UBS Copper Sub-Index, itself based on the futures market.
From this gamut of investment options, the physical metal fund is the one
most suited to when the copper market is in contango, minimising as it does the
cost of a futures position being rolled forward.
AN INVESTOR OF A DIFFERENT KIND?
JP Morgan's and Blackrock's proposed copper ETFs look more targeted, and
each company obviously feels the target is worth two years (and counting) of
jousting with the regulators.
So who would be the target investor big enough to absorb 180,000 tonnes of
The "man in the street" seems a highly unlikely proposition, particularly
since ETF Securities is itself a specialist in bringing wholesale investment
options to the retail market.
Nor would it be any part of the investment community already active in the
copper market, whether directly or via an index such as the DJ-UBS Copper
Sub-Index or the legion of CTAs.
The one part of the investment universe that would have the appetite for
such a product and the collective fire-power to justify the tonnage implied by
the two listing documents would be the ultra-conservative U.S. pension fund
Many pension funds are required by their own rules to invest only in
U.S.-listed securities. Many are explicitly forbidden by the same rules from
having anything to do with a derivatives market, even a well established futures
market such as COMEX copper.
For such players, investing in copper really comes down to buying the shares
of Freeport McMoRan. There simply aren't a lot of other options.
A U.S.-listed ETF backed by physical metal with no linkage to anything that
might be deemed a "derivative" would tick all the right boxes.
But if such slumbering giants are the target of the two proposed copper
funds, analysing the impact of ETF Securities' physical copper ETF on price is
about as relevant as comparing copper with, well, gold.
Moreover, pension funds would probably be a different type of investor than
those currently involved in the ETF space, more long-term "buy-and-hold" than
short-term "chop and change".
In which case, copper fabricators are probably right to be worried.