U.S. regulators have finally approved JPMorgan Chase & Co's controversial plan to launch a copper exchange-traded fund backed by actual stockpiles of the metal, dealing a blow to end users who fear the product will wreak havoc on prices.
The U.S. Securities and Exchange Commission ruling ends a two-year effort by the U.S. bank to win regulatory support for its fund, which would effectively allow U.S. retail investors to trade physical copper easily for the first time.
It is also a defeat for consumers of the metal, which is used in plumbing and cooling systems. Since the fund will use physical copper cathode as collateral against shares of the fund, effectively removing a chunk of metal from the market, users fear it will affect supplies and inflate prices.
U.S. Senator Carl Levin, a Democrat from Michigan, also voiced his opposition to the plan. In July, Levin said the funds would cause a boom-and-bust cycle in the copper market.
Giving its backing for the product, the commission said it did not believe the fund would disrupt the flow of copper for immediate delivery.
"The Commission does not believe that the listing and trading of the shares is likely to disrupt the supply of copper available for immediate delivery, which is what (the copper fabricators) predict would increase the price of copper," it said in its ruling dated Friday and posted on its website on Monday.
Luvata, which makes heat-transfer products such a coil used in air conditioning and refrigeration equipment, was one of five physical copper users that joined forces to fight the proposal.
"It's a sad day for industrial users and consumers. The outcome of the report is a nonsense," said Luvata's senior vice president of sourcing Bob Kickham in an interview.
A spokeswoman for JPMorgan declined to comment.
The ruling will likely be seen as a benchmark for another ETF, the iShares Copper Trust proposed by BlackRock Inc. The SEC is due to rule on that fund by December 24.
A consortium of U.S. copper fabricators - SouthWire Co, Encore Wire Corp, Luvata and AmRod - as well as Red Kite, a large hedge fund and physical trader, have fought hard to get the SEC to block the JPMorgan and BlackRock funds.
They say the removal of up to 183,000 tonnes of copper, which would be used as collateral against shares in the funds, would have a "devastating" effect on the market.
While that is only a tiny part of a 20-million-tonne annual global market, fabricators worry that it accounts for the majority of the metal available in exchange-bonded warehouses.
They argue there is not enough metal available outside the exchange networks for immediate delivery to prevent a squeeze in supply because it is tied up in long-term contracts.
The long-running dispute has divided traditional industrial consumers, which use copper in everything from air-conditioning units to cars, from banks looking to attract investors seeking exposure to the potentially lucrative copper market.
JPMorgan and BlackRock say such fears are unfounded because the funds would be miniscule compared with the global market. Emphasis on exchange stocks as a measure of spot metal availability has been overdone, they say.
The ETF would sell investors shares in a fund backed by physical metal as collateral. JPMorgan and BlackRock have said that would make it easier for smaller investors to get exposure to copper prices, which have more than doubled in seven years, lifted by demand from China, the world's biggest copper consumer.
JPMorgan's fund would store LME brand-approved copper valued at up to $499,761,150 - equivalent to about 62,000 tonnes based on a copper price of $8,000 per tonne. BlackRock's iShares Copper Trust would use up to 121,200 tonnes of copper as guarantee against shares in its fund.
The two funds would equate to 70 percent of current copper stocks in LME-bonded warehouses.
"If you have a quarter of a million tonnes of copper in LME and an ETF that looks as though it will take a sum almost equivalent to the entire LME stocks, you can't tell me it won't have an effect," Luvata's Kickham said.
Some say concerns that the funds will remove a significant chunk of metal from the market may be exaggerated given that a similar fund in Britain has only had limited success.
ETF Securities launched a copper fund in October 2010, but it has only amassed investments representing just about 1,950 tonnes of copper worth about $16 million at today's prices.
"The jury's out. We have to see how many people buy this ETF and how much stock will be tied up. It just may flounder because people would rather buy a commodity basket rather than be tied into copper itself," said Ed Meir, metals analyst at brokerage INTL FCStone.
(Reporting by Josephine Mason; Editing by Lisa Von Ahn, Nick Zieminski)