JP Morgan, BlackRock eye copper ETFs

JP Morgan (NYSE: JPM) and BlackRock(NYSE: BLK) have filed applications with the Securities and Exchange Commission to launch the first physically-backed copper exchange traded funds in the U.S.

The two firms are also telling U.S. regulators that copper supply outstripped demand last year, according to a report.

According to JP Morgan’s previous prospectus, the copper market is experiencing problems from the supply side and higher demand from the emerging markets, reports Tatyana Shumsky for The Wall Street Journal.

However, according to the BlackRock prospectus, “historically (based on approximately 60 years of data), the tonnage of mined copper is less than total demand for refined copper.”

In filings, JP Morgan and BlackRock confirmed that copper production in 2010 outpaced demand by more than 2 million tons. In contrast, most commodity strategists project a supply shortfall for the year.

Justin Lennon, a metals analyst with Mitsui Bussan Commodities, attributes the simultaneous deficit and surplus outlook to economic forecasts that only account for production and demand for the calendar year, which may exclude excess stores carried over.

“The (current) oversupply is a consequence of the economic conditions of the last three years, and current and future deficits will be strong enough to digest that oversupply,” Lennon commented. At least one million tons of the surplus “isn’t available for sale, it has to be part of the ebb and flow of moving copper down the line to the ultimate end product.”

BlackRock postulates that there are “unreported copper inventories held by the State Reserve Bureau in China and by other market participants in China,” according to the WSJ story.

The exemptive relief filings with the SEC were meant to assuage concerns that the physically-backed copper funds would somehow affect supply and heighten volatility in a metal intended for industrial purposes.

“The SEC wouldn’t want to have a fund out there to hoard a metal that would otherwise be consumed,” remarked Paul Justice, director of North American ETF research at Morningstar. “The main difference is that copper is typically consumed in industrial purposes and not stored or hoarded [like gold].”

The iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEArca: JJC), First Trust ISE Global Copper Index Fund (NYSEArca: CU) and Global X Copper Miners ETF (NYSEArca: COPX) are existing products on the market.