NEW YORK The Securities
and Exchange Commission (SEC) ignored warnings over the impact
a physical copper exchange-traded fund (ETF) sponsored by
JPMorgan Chase & Co. could have on lengthy queues at London
Metal Exchange warehouses and on the incentives and premiums
paid for metal, according to a court filing by a major U.S.
Carrollton, Ga.-based copper
fabricator Southwire Co. said in documents filed with the U.S.
Court of Appeals in Washington that the SEC failed to consider
evidence it had provided showing the launch of a physical ETF
could exacerbate a "bidding war" for copper among competing
warehouse owners and end users.
The market is "already being
severely constricted as a result of owners of LME warehouses
paying huge premiums to metal producers to place copper that
otherwise would be available for immediate delivery into
warehouses with lengthy queues for physical delivery," the
Copper premiums in Antwerp
jumped to as much as $100 per tonne last week, in line with
incentives being offered by traders and warehouses to draw the
metal into storage, according to AMM sister
publication Metal Bulletin.
"Such practices by warehouse
owners have led to vast amounts of such copper being stored in
LME warehouses in New Orleans, Antwerp and Johor (Malaysia)
where, when sold, it may not be available for physical delivery
for months," the filing said. This is "a phenomenon which has
effectively eliminated those warehouses as markets for copper
available for immediate delivery, thus substantially shrinking
the market for copper available for immediate delivery to
whatever is delivered to a port where it could go on warrant in
an LME warehouse or sold to an end user."
"The SEC not only failed to
analyze the market as it exists today, but failed to analyze
what the impact would be as authorized participants begin to
vie with warehouse owners and end users for the limited supply
of copper when it arrives in an LME port city such as New
Orleans, Antwerp or Johor," the filing said. "The SEC looked
only at existing premiums, concluded that they fluctuate, and
failed completely to analyze what the premiums would
beand the cost to industrial end users and their
customerswhen shares of the (ETF) begin to be listed and
Southwire made the comments in
its continuing appeal of a decision by the U.S. regulator to
allow JPMorgans physical copper ETF (
amm.com, Feb. 13).
The filing written by lawyer
Robert Bernstein, a partner at New York law firm Eaton &
Van Winkle, listed a number of factors Southwire alleges the
SEC had failed to examine despite having been alerted to the
companys concerns, including how much copper is currently
being held by JPMorgans LME-approved warehouse subsidiary
Henry Bath, as well as the development of queues at those
The filing said the SEC had not
examined the impact on copper consumers of the premiums they
must now pay as a result of the warehouse queues, and how those
premiums might change once the physical ETF is introduced.
JPMorgan argued that any copper
taken out of LME warehouses for the ETF would not disrupt
copper supplies because it would "remain available for
immediate delivery to consumers and participants in the
The bank plans to start small
and build up. The product will be backed by less than 10,000
tonnes of copper when it initially launches and eventually
reach an estimated 61,800 tonnes, although JPMorgan could seek
to increase this if the product proves to be successful.
Southwire said in the filing
that the ETF will create an "investor-financed squeeze" of the
market, and together with the recently approved BlackRock Inc.
physical copper ETF the products could remove 180,000 tonnes of
copper from the marketnearly 40 percent of LME copper
amm.com, Feb. 25).
Southwire has not yet formally
appealed the SECs decision to approve the BlackRock ETF,
but the companys comments in the JPMorgan filing indicate
it will do so and then move to consolidate the two appeals, a
person familiar with the matter said.
The SEC did not identify or
discuss alternatives to alleviate concerns over the ETF, the
filing said, such as imposing "reasonable limits" on the amount
of copper the ETF may hold or requiring that LME-grade copper
held in the physical ETF be limited to metal that is on
warrant, "which would at least keep copper acquired by the
(ETF) subject to the LMEs anti-squeeze rules."
Southwire complained that the
SEC held a meeting with representatives of JPMorgan and its
counsel to discuss the ETF Dec. 6 that it did not disclose
until January, when the rule had already been approved (
amm.com, Dec. 17). But on Dec. 5 the SEC formally
denied a request for a similar meeting by Southwire and other
industrial users who were part of a consortium opposed to the
ETF before it was launched, the filing said.
The consortium included
Southwire, AmRod Corp., Newark, N.J., Encore Wire Corp.,
McKinney, Texas, and London-based Luvata UK Ltd., along with
metals-focused hedge fund RK Capital Management LLC, London.
The other consortium members have dropped out of the appeal
process, which is likely to be time consuming and costly.