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ETF impact on copper queues key: consumers

Keywords: Tags  ETF, copper, warehouse queues, LME, SEC, JPMorgan Chase, BlackRock, Southwire Luvata

NEW YORK — Copper consumers opposed to the launch of physical exchange-traded funds (ETFs) have called on the U.S. Securities and Exchange Commission (SEC) to investigate the queues at London Metal Exchange-registered warehouses, citing New Orleans as the "most alarming" example of why the market might suffer if the products are launched.

Metal backlogs at LME-listed warehouses are spreading due to lucrative incentives for metal to be put into storage, Robert Bernstein, a partner at New York law firm Eaton & Van Winkle LLP, said in a letter to the SEC.

"In addition to promoting a physical copper-backed ETF, which will create forced scarcity, owners of LME warehouses—including ETF sponsor JPMorgan Chase & Co.—now appear to be competing with end-users for available supply by paying producers with surplus metal huge financial incentives to deposit their metal in LME warehouses," Bernstein said, adding that these backlogs would be exacerbated by the launch of ETFs. He represents some of the biggest U.S. copper consumers, including Southwire Co., Encore Wire Corp., Luvata UK Ltd. and AmRod Corp., along with metals-focused hedge fund RK Capital Management LLC.

Once the metal is in warehouses it can be sold, "reportedly in some cases to owners of other LME warehouses, which is what is reportedly creating and perpetuating the ever-growing queue," he said, referring to the $100-per-tonne and higher incentives being paid by warehousing firms in New Orleans to attract copper into storage there.

The copper consumers argue that taking 183,000 tonnes of copper from the market—which the ETFs would require—would prevent them from securing delivery of the copper they needed, almost certainly would force some production to be curtailed due to higher costs that customers can’t absorb and would disadvantage them against their competitors outside of the United States.

"The queue creates a scarcity of free units of metal that not only forces up premiums above LME cash prices in local geographical markets, but it ultimately may prevent industrial end-users like Southwire, Encore, Luvata and AmRod from obtaining access to the metal they need in a timely fashion," Bernstein said. "The development of these warehouse queues, combined with the launch of physical backed copper ETFs, could thus have a devastating impact on the copper supply chain in the United States, which would obviously be contrary to the public interest."

Industrial users like Southwire and Encore, in particular, "believe they will now be faced with the prospect of not being able to supply enough copper products to their principal customers, including Home Depot and Lowes, and they are especially concerned that such shortage of supply will worsen if the proposed rule changes are approved and the U.S. construction industry begins to recover," he said.

The LME has responded to the delays in accessing metal by proposing a rule change which, if implemented next April, would require warehouses with certain tonnages of other metals scheduled for delivery to remove a minimum daily quantity of less dominant metals in its warehouses, Bernstein said. "But it is not clear that such a rule, even if implemented, would be effective, and in the meantime, as warehouse owners continue to pay higher and higher incentives to get metals deposited into their warehouses, the queues are getting longer," he added.

Bernstein’s clients called on the SEC to "examine what is happening with these warehouses and determine for itself whether and to what extent approval of these proposed rule changes at this time, and in its current form, would be contrary to the public interest."

The SEC is set to decide before the end of this month whether to approve the physical copper ETFs, proposed by subsidiaries of JPMorgan Chase and BlackRock Inc.

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