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Copper ETF could lead to market squeeze, buyers say

Keywords: Tags  copper, ETFs, Sumitomo, JP Morgan, Southwire, Encore Wire, Luvata, AmRod BlackRock


LONDON — A group of copper consumers has warned that JPMorgan & Chase Co.’s physical copper exchange-traded fund (ETF) could create a market squeeze similar to that caused by a rogue trader at Japan’s Sumitomo Corp. in the 1990s.

In a letter to the U.S. Securities and Exchange Commission (SEC), a lawyer representing the consumers called for the U.S. regulator to reconsider its decision to approve the ETF on the grounds that, as drafted, it is legally insupportable.

The letter signed by Robert Bernstein, a partner at New York law firm Eaton & Van Winkle LLP, listed several reasons why the consumer group believes the approval order is "flawed."

Bernstein said the removal of copper from the market for the ETF will create "catastrophic damage" for industrial users of the metal, and noted that the SEC had "ignored evidence of the history of past corners and squeezes of the copper market," including the Sumitomo copper scandal in the 1990s.

"Just as was the case in Sumitomo, the listing and trading of the shares will almost certainly result in the removal of substantial quantities of warranted copper from LME and Comex warehouses in the United States," Bernstein said, and the SEC was ignoring current warnings that the ETF would lead to "fraud and manipulation."

In June 1996, Sumitomo reported a loss of $1.8 billion in unauthorized copper trades on the London Metal Exchange. Sumitomo later admitted higher losses of $2.6 billion, currently the sixth-highest trading loss in history.

"The commission should reconsider its order and, upon further review, based on substantial evidence on the record, it should reverse its decision and deny approval of the proposed rule change," Bernstein said.

The consortium includes Southwire Co., Encore Wire Corp., Luvata UK Ltd. and AmRod Corp., along with metals-focused hedge fund RK Capital Management LLC. The four copper companies represent about 50 percent of the United States’ copper fabricating industry, converting copper cathode into copper pipe, rod, wire and tubing.

The SEC approved JPMorgan’s physical copper ETF in December (amm.com, Dec. 17), but has delayed a decision on a similar product by BlackRock Inc. until February (amm.com, Dec. 27).


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