SEC under attack for approving JPMorgan’s copper ETF

Eaton & Van Winkle LLP, a New York-based law firm representing US top copper consumers, is branding as “arbitrary and capricious” the Securities and Exchange Commission’s (SEC) decision to approve the debated JPMorgan XF Physical Copper Trust fund.

Although the attack is not a formal appeal yet, it is likely to delay the launch of the JPMorgan copper exchange-traded fund, first publicly proposed in October 2010.

According to a document filed by Vandenberg & Feli, the previous law firm representing the consortium of fabricators, the move will “grossly and artificially inflate prices for an industrial commodity in short supply and … wreak havoc on the US and global economy.”

Opponents to the new investment product, criticized by US politicians and copper producers since its inception, say it will absorb 61,800 metric tonnes of copper.

The group, which includes manufacturers who account for nearly 50% of US copper demand as well as London-based trading house Red Kite, claim the SEC did not have sufficient evidence to conclude that the launch of the copper ETF would not affect supply of the metal.

If critics are to be believed, writes Steve Johnson for the FT.com (subs. required) the SEC “has opened the door to the widespread doctoring of the price of copper, with potentially serious ramifications for the world economy, given the metal’s ubiquity in electrical wiring.”

Gold ETFs have been very supportive of the price and combined these funds now hold almost 2,500 tonnes of the precious metal, but given copper's essential role in the global economy investors hoarding physical supply will have a different dynamic altogether.

According to Mickey Fulp, author of The Mercenary Geologist, since 30% of the copper stored in warehouses is not available to the market prices might skyrocket.

“The real concern here is that physical ETFs for industrial metals could be disastrous for the supply-demand fundamentals of the market. I personally do not think that this ETF is going to come about. If it does, then we will have even more manipulation of the copper market than at present. I don't think that would be good for a healthy supply-demand balance,” he wrote.

In early 2012, an entity took control of up to 90% of cash contracts and inventories on the LME .  Stock levels at the LME's 600 warehouses around the world are at historically low levels of 250,00 tonnes – down from 450,00o tonnes a year ago. 73,500 tonnes are also held in COMEX warehouses.

Asset management firm BlackRock Inc. (NYSE:BLK) and ETF Securities Ltd. have also said they plan to start physically backed ETFs for industrial metals in the U.S.

Copper is often referred as “Dr. Copper” for its alleged foretelling powers in signalling the health, or otherwise, of the global economy.

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