October 11, 2013 / 2:47 PM / 4 years ago

LMEWEEK-Investors buy physical base metals despite delayed ETFs

* Julius Baer attracts $14 mln in new physical metal funds

* Banks such as Credit Suisse offer physical metal deals

* No launch date for ETF copper funds from JPMorgan, BlackRock

By Eric Onstad

LONDON, Oct 11 (Reuters) - Investors are finding alternative routes to get exposure to physical industrial metals such as copper and zinc despite the delayed launch of two big U.S. exchange-traded funds.

New funds sponsored by Swiss private bank Julius Baer have accumulated assets of over $14 million in less than two weeks after their launch while banks including Credit Suisse are offering physical metals to investors.

Some pension funds are keen on physical metal because they are prohibited from buying futures while other investors regard physical assets as less correlated to other financial markets and help diversify their portfolios.

No launch dates, however, have been announced by the world’s largest money manager, BlackRock, and Wall Street bank JPMorgan Chase & Co for long-planned physical exchange traded funds (ETFs) in copper after years of controversy.

Critics, which include industrial users, have said the funds will inflate prices and squeeze supplies by removing a big chunk of metal from the market.

Existing physical metals funds by London-based ETF Securities have struggled to gain traction, mainly due to high storage costs, but Julius Baer hammered out a deal with trading houses that cut those expenses.

Buying physical base metals for long-term exposure, rather than for financing or “cash-and-carry” as it is also known, is a viable alternative to commodity index exposure to the sector, said Kamal Naqvi, head of EMEA commodity sales and global head of metals trading at Credit Suisse in London.

“If you think the market is in surplus and contango entrenched for the foreseeable future but there is a good long-term story, like in aluminium or zinc, it may make sense to own the physical metal. The other thing it does is eliminate counter-party risk,” he added.

A market is in contango when prices in the future are higher than current ones.

Such transactions can be viable through deals with trading groups which cut storage costs by using so called “off-warrant” warehouse facilities.

While holding physical metal in LME-certified warehouses involves rental charges of over 40 cents per tonne per day, off-warrant deals in non-LME facilities have charges at a third of that level, industry sources say.

It also appeals to investors who value privacy and are wary of ETFs, which are listed and regularly provide data on additions to and liquidations from the funds.


Investors have also started to invest into the Julius Baer (JB) Industrial Metals Funds in aluminium, copper, nickel and zinc, which were launched on Oct. 1.

The four funds so far have $14.3 million in assets and there has been further interest, Stephan Mueller, head of product management and development at Swiss & Global, told Reuters.

Swiss & Global, a manager for Julius Baer, is part of GAM Holding, Switzerland’s largest listed asset manager with assets of $126 billion.

The assets may have been higher except for the uncertainty with the U.S. fiscal situation, Mueller said.

“For the moment, the U.S. government shutdown is throwing a shadow over all of our funds. It’s quite a poor moment to take decisions for them (clients), so they’re hesitating.”

Currently, financial investments in the funds are spread fairly evenly across the four metals with copper and aluminium the highest at 28 percent and 27 percent respectively while the other two each have 22 percent.

Mueller is aiming to grow the combined funds’ assets to $150 million to $300 million within six to nine months. “We’re targeting a similar growth pattern which we experienced in platinum and palladium.”

Swiss & Global launched Julius Baer physical funds in platinum and palladium in 2010, which have assets of $119 million and $138 million respectively.

Swiss & Global has cut costs to store base metals through an agreement with commodity trader Trafigura to place metal in under-used warehouses at cheaper rents.

It hopes the structure enables the funds to avoid the controversy that has swirled around the planned BlackRock and JPMorgan physically-backed funds over the potential impact on key raw materials supplies.

Both the BlackRock and JPMorgan copper ETFs have been approved by the U.S. Securities and Exchanges Commission, but neither has launched following objections by industrial users.

BlackRock and JPMorgan declined to comment.

There is still disquiet about the impact of physical funds, especially in copper. “We’re nervous about an ETF in copper. Copper actually is supply constrained so you could conceivably create problems in the real world by hoarding copper,” said Doug Hepworth, executive vice president at Gresham Investment Management in New York.

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