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Copper ETF rings hollow for wire manufactures, miners

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Two prominent consumers of copper have filed suit against JP Morgan to prevent the release of a planned copper ETF, joining the mining industry as opponents of the retail-friendly investment vehicle.

The Wall Street Journal reported that Southwire Co. and Encore Wire Corp. have jointly filed a petition to the Securities and Exchange Commission to halt the offering of the JPM XF Physical Copper Trust ETF. The companies are concerned that the ETF, which will initially hold 62,000 tonnes of copper in warehouses to support the fund's net asset value, will remove physical copper from the useable market and drive their input prices higher.

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Mining companies have a different concern. Physical ETFs allow investors to benefit from commodity price increases without accepting the high costs and operational risks of an actual mining company.

The effect of gold ETFs on gold mining stocks is justifiably terrifying for mining companies. Previous to the issuing of the SPDR Gold Shares in late 2004, gold miner stocks tracked the bullion price. Immediately after gold-backed ETFs were issued, the performance of gold mining stocks began trailing far behind. Even worse, as the operating environment for miners becomes more difficult, global supply falls and the commodity price, along with the ETF, climb higher. Financing for mining companies, always an issue, becomes scarce as resource investors focus assets in the ETFs.

Copper miners have no interest in seeing their stocks get bludgeoned like gold miners before them. But the fact remains that ETFs backed by physical assets are extremely convenient for investors at a time when market faith is increasingly in question. The SEC has a difficult decision ahead.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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