US Senator Carl Levin has written a letter to the Securities and Exchange Commission (SEC) saying that the JPMorgan’s proposed copper ETF should be blocked because it will remove a significant amount of copper from the market.
“There is ample evidence that the proposed ETF will disrupt the market supply of copper by removing from the market a substantial percentage of the copper available for immediate delivery, This supply disruption is likely to affect the cash and futures market for copper, increasing volatility and driving up its price to create a bubble and burst cycle,” wrote Levin.
Levin says that the copper ETF would allow speculators to “create a squeeze on the market”.
Although there were 3.5 million metric tons of copper stock globally in 2011, Levin says that there were only 808,000 tons that are registered with the exchanges and this small part is what comprises “liquid stock” that is available for immediate delivery.
Based on JP Morgan’s filing, the proposed ETF “will acquire 61,800 metric tons of copper to back its initial shares” or about 7.65% of liquid stock.
Of course, this can grow as the ETF grows, but as new competition enters, due to a precedent the legal approval of the ETF establishes, others like BlackRock, Levin says, will take out more copper supply.
“If BlackRocks’s copper ETF is also approved, it will acquire an initial 121,200 metric tons of copper. Together these Trusts would hold approximately 34% of the stocks of copper available for immediate delivery,” points Levin.
As a result, reasons Levin, copper price will inevitably rise which will initiate a positive feedback loop:
“As the price of copper in the market rises, demand for shares of the Trust will likely increase as well, leading the Trust to create more shares, removing even more copper from the market and further decreasing the liquid supply. This artificial supply and demand pattern is likely to create a boom and bust cycle, as speculators enter and leave the market.”
Levin’s opposition, say commentators, will complicate the approval process with SEC.