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  • jrpalladin jrpalladin Oct 23, 2010 6:13 PM Flag

    JPM - Lauches Copper ETF - I like it

    J.P. Morgan to Launch Copper ETF
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    LONDON—J.P. Morgan Chase & Co. will launch a physical copper exchange-traded product, according to a filing made late Friday to the U.S. Securities and Exchange Commission, marking a further bullish stamp of approval for the metal as prices approach new all-time highs. A start date was not given in the filing.

    The product aims to offer institutional and retail investors a way to participate in the physical copper market through an investment in securities without having to buy and store the metal themselves. The logistics of transporting and storing physical copper will be dealt with by J.P. Morgan's warehousing firm, Henry Bath Group, and the related expenses will be built into the price of the shares.

    Copper, a key industrial metal used in housing and construction, is currently the darling of the investment community, attracted by its increasingly bullish supply-demand fundamentals. Prices have soared since plummeting during the economic downturn and are now back near all-time highs approaching $8,900 a metric ton.

    In its filing, J.P. Morgan cited industry statistician Brook Hunt to point to constraints in expanding global copper-mine supply and a revival in consumption due to a Western economic recovery and ongoing robust demand in emerging markets.

    ETFs are investment funds that trade like stocks on exchanges and track stock sectors, commodities or other financial instruments. They have been a success in gold, with the SPDR Gold Shares alone worth some $55 billion. If the physical copper exchange-traded products are as successful as they have been in gold, they are set to provide a strong new demand source for the metal and will likely lift prices even higher as the material needed to back them tightens the market even further.

    The copper for J.P. Morgan's product will be held initially in Henry Bath's warehouses in Germany, the Netherlands, Italy, Malaysia, Singapore, Spain, South Korea, the U.K. and the U.S., the filing said. The cheapest location to deliver physical copper is currently in the U.S., the filing noted, where Henry Bath has warehouses in Baltimore, Chicago and New Orleans.

    The move follows ETF Securities, which said recently it plans to launch physically backed exchange-traded commodities for base metals including copper, aluminum, lead, nickel, tin and zinc. The key difference with the J.P. Morgan product is that the ETF Securities product will be backed by London Metal Exchange warrants, not against off-warranted, over-the-counter metal. LME warrants are a document of possession for each lot of LME-approved metal officially held in a warehouse.

    The world's biggest copper producers and consumers are unfazed at the prospect of the launch of ETFs. In a series of recent interviews with Dow Jones Newswires, the chief executives of companies including Chile's Codelco, the U.S.'s Freeport-McMoRan Copper & Gold and Germany's Aurubis AG plus the head of risk management at France's Nexans said the ETFs will provide a further demand source and attract new participants to the market.

    Shares in J.P. Morgan's product are expected to be bought and sold like any other exchange-listed securities on an exchange. The filing didn't specify on which exchange the shares will be listed.

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    • It seems to me that such a fund, if it becomes large, increases the volatility of Cu prices and thus of TGB, FCX, etc. shares. In saying that, I'm assuming that JPM will go out and buy CU as it sells ETF shares to investors and it will store the physical metal in warehouses, thereby taking it off the market. As long as there is a bull market for Cu, there will be more buyers than sellers, and the warehouse stocks will grow. That reduces supply when Cu demand is high, and would push Cu prices higher. If the mood for Cu becomes negative, ETF sellers will outnumber buyers, and JPM will sell metal from the warehouses into a declining Cu market, accelerating the Cu price decline.

      I'm not objecting to any of this - it's free enterprise and all. But I'm not sure it's a good thing for TGB in terms of having predictable markets and avoiding boom-bust cycles.

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