Home: Metals boom sees the return of physically-backed funds

Image: Nornickel

(The opinions expressed here are those of Andy Home, a columnist for Reuters.)

The boom times have returned for industrial metals over the last year as global manufacturing activity has come roaring back from its pandemic lows.

There is more to come, according to supercycle super-bulls such as Goldman Sachs who think that commodities demand growth is about to undergo a tectonic acceleration as the world decarbonises.

Given the hype around metals such as copper right now, it’s not surprising that someone has dusted down and repackaged an investment idea last seen at the peak of the 2000s supercycle – the physically-backed exchange-traded fund.

ETF Securities launched physically-backed metal funds in 2010 but they didn’t make it through the bear years either

Nornickel, through its Global Palladium Fund (GPF) arm, has just launched physically-backed copper and nickel investment products on the London Stock Exchange.

The introduction of investors into the physical supply chain was so controversial last time around that copper consumers ended up taking the Securities and Exchange Commission (SEC) to court for its approval of two big copper products.

In the end neither made it off the drawing-board and other investment attempts to get physical with the industrial metals markets fizzled out.

Will this time be different?

Investors vs physical buyers

What provoked the wrath of companies such as Southwire Co and Encore Wire Corp when the SEC approved two physically-backed copper funds in 2012 was the fear of investors directly impacting the physical supply chain.

JPMorgan’s Physical Copper Trust and Blackrock Asset Management’s I-shares Copper Trust between them proposed to hold as much as 182,800 tonnes of copper.

JPMorgan summarized the reason for copper users’ concerns in its own prospectus: “Since there is no limit on the amount of Physical Copper that the Trust may acquire, the Trust, as it grows, may have an impact on the supply and demand of copper that ultimately may affect the price of the Shares in a manner unrelated to other factors affecting the global markets for copper.”

You can understand why industrial players were outraged, fearing they would be directly competing for units with investors.

The GPF Physical Copper ETC and GPF Physical Nickel ETC currently have assets under management of around US$5m each, equating to physical stocks of 525 tonnes and 288 tonnes respectively.

That’s not enough to move the dial in either copper or nickel market. But with both “electric” metals expected to benefit hugely from the transition to a low-carbon economy, things may change if the funds draw in more investors requiring the allocation of more physical metal at a time of tightening supply.


Neither JPMorgan nor Blackrock actually launched their proposed copper funds, perhaps because of the backlash from industrial users but more likely because by the time the SEC signed off on them, the copper price had passed its cycle peak and was one year into a bear market that would only trough in 2016.

ETF Securities launched physically-backed metal funds in 2010 but they didn’t make it through the bear years either. At its peak in 2013 the physical copper fund held 6,900 tonnes.

The rationale then was the same as it is now, namely to open up industrial markets such as copper to previously untapped investors.

GPF, which also offers four physically-backed precious metals funds, is “committed to democratising investment in precious and base metals,” according to the fund’s chief executive Alexander Stoyanov.

Given the inherent perversity of markets, it’s almost inevitable that the launch of the funds has coincided with a slump in the industrial metals complex

The products come with the cachet of blockchain proof of ownership of metal in Rotterdam, which may appeal to parts of the digital currency investment spectrum.

Many heavyweight fund managers, meanwhile, have limited ability to get involved in metals such as copper because they are allowed only to invest in equity instruments not futures markets.

An exchange traded note ticks that box with physical backing also meeting recurring demand for hard assets.

But these products are still in essence a punt on higher prices, albeit with green branding.


Such funds also come with some drawbacks relative to non-physical investment products.

The physical cost of storage must somehow be recouped by the fund manager, meaning costs tend to be slightly higher. GPF’s copper fund has a management expense ratio of 0.85%, compared with 0.49% management fees charged on the Wisdom Tree Copper futures-linked fund.

More significantly, physical funds forfeit the potential yield of rolling a long position across a backwardated futures curve.

If you’re buying a physical fund because you expect prices to go higher, they are only likely to do so if supply-demand balances get squeezed, which would surely be accompanied by a tightening of futures curve time-spreads. The resulting roll yield accentuates the returns of a futures over a physical product.

Somewhat counterintuitively, holding physical metal works well for investors in an oversupplied market since they can use the market’s curve structure to generate a return above the costs of storing the stuff.

It’s worth remembering that the first anyone ever heard of a physically-backed industrial metals fund was a potential aluminium product devised by Credit Suisse, although it too came to naught after Swiss regulators prevaricated over its approval.

Supercycle product

GPF’s new offerings – “the world’s only physically-backed copper and nickel Exchange Traded Commodities” – are a sure sign that the supercycle, or at least the supercycle hype, is back.

The last supercycle, generated by China’s industrialisation, lifted industrial metals out of the investment shadows. Physically-backed exchange traded products were part and parcel of the investment buzz around the commodity markets at the time.

The resulting furore and regulatory hesitation ensured that neither the JPMorgan nor Blackrock copper product made it in time to actually catch the super part of the cycle.

That tells you that the single biggest factor in the success or otherwise of Nornickel’s revamped “green metal” products will likely be price.

Given the inherent perversity of markets, it’s almost inevitable that the launch of the funds has coincided with a slump in the industrial metals complex. London Metal Exchange (LME) three-month copper has this week collapsed from a Monday high of $10,050 per tonne to a current $9,220.

The super-bulls will be undeterred, arguing that the supercycle has only just begun.

Nornickel and its GPF fund managers can only hope they’re right.

(Editing by Elaine Hardcastle)


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