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Copper ETFs Blemished After Chinese Investigation


China’s crackdown on metal financing is weighing on copper exchange traded funds, sending copper futures to a six-week low. However, some argue that the risks are exaggerated and the sell-off may be overdone.

The iPath Dow Jones-UBS Copper Total Return Sub-Index ETN (JJC) is down 0.6% Thursday while the  United States Copper Index ETF (CPER) declined 1.2%. Over the past month, JJC fell 1.9% and CPER has dipped 0.2%.

China’s State Reserve Bureau, the agency that stockpiles strategic commodities, along with large banks, are reviewing the alleged fraud involving metals used to obtain loans, Bloomberg reports.

“The Qingdao probe has been a drag on copper,” Frank Lesh, a trader at FuturePath Trading LLC, said in the article. “Those financing deals are out of favor. The thought is that those commodities are entering the market place now” as finance deals using copper are unwound.

COMEX copper futures fell 0.8% Thursday, trading around $3.015 per pound. So far this month, copper prices have decreased 3.3% as observers anticipate diminished copper inventory financing, a source of Chinese demand.

“The ongoing investigation (at Qingdao port) is still the main theme which is causing the selling pressure for the metal,” Naeem Aslam, chief market analyst at Ava Trade, said in a Reuters article.

Copper analysts, though, believe this event will be a short-term blip. The investigation will unlikely “break” the copper market, according to the Bank of America. The bank calculates that the unwound positions would only come to less than a day of Chinese demand.

According to Macquarie’s Vivienne Lloyd, an estimated 600,000 to 890,000 tons of copper sit in bonded warehouses inside custom zones, or 4% of global supply. However, 600,000 tons are held by those who can endure the credit squeeze or those who will physically use the metals, which leaves about 290,000 tons, or 1.3% of supply that could affect global supply, reports Abheek Bhattacharya for the Wall Street Journal.

Standard Chartered also reassured markets that it is not pulling out of its commodity financing commitments in China.

“The fundamentals remain strong … and we think any kind of sell-off could be a buy opportunity in the longer term,” Aslam added.

iPath Dow Jones-UBS Copper Total Return Sub-Index ETN


For more information on the copper market, visit our copper category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.