London Calling on a looming, copper-bottomed, threatPublished by MAC on 2013-01-21
Source: Nostromo Research
"It's simply criminal". That's what London Calling called "the type of purely speculative activity that currently seems to be driving the [copper] market to bullish heights".
This was almost exactly two years ago, in January 2011.
At the time we declared that "the recent copper market boom is a dangerous illusion... triggering potential massive new investment in existing mining projects and ... spurring revival of mines which should have been properly closed down and rehabilitated years ago".
And this wasn't the first occasion when we'd sounded a warning bell.
Back in October 2009, London Calling quoted a well known UK analyst, Simon Hunt as asking: "Could the drove of optimists - now creeping out of the woodwork all over the shop - have got it seriously wrong? If so, prudence alone (not to mention ethics) requires a concerted shift to a global post- mining scenario".
In November 2010, the market price of copper began rising to unprecedented heights, spurring JPMorgan, along with BlackRock, the world's most diversified investor in mining, to propose setting-up commodity-based exchange traded funds (ETFs) which would buy and store the metal in their own warehouses.
Their ostensible aim was to promote copper as a "store of value", similar to that long-established for gold.
But, as Simon Hunt warned at the time: "The record copper price is being driven by speculators, hedge fund buying, and Chinese stockpiling and hoarding. Although copper is up 55% since its low of $2.77 in late June , the supply and demand fundamentals simply do not support all time record prices".
Hunt's view was supported by geologist Micky Fulp, who commented:
"At this juncture, it does not appear to me that basic supply and demand fundamentals are strong for the copper market in the short term. There is evidence to indicate that the market is overbought by speculators and hoarders. That said, there are other factors, especially the new copper ETFs that could drive prices substantially higher".
In recent weeks JPMorgan has apparently won the day, having been granted permission by the US Securities and Exchange Commission (SEC) to set up its XF Physical Copper Trust Fund - an ETF in all but name - and store copper under its own control.
It's a move that's has already been heavily attacked by a New York law firm (representing copper fabricators) which claims it will "grossly and artificially inflate prices for an industrial commodity in short supply and ...wreak havoc on the US and global economy."
Micky Fulp agrees, saying that "since 30% of the copper stored in warehouses is not available to the market, prices might skyrocket."
For which, of course, read: more exiguous profits for the hoarders, hedge funds and unscrupulous traders, as consumers pay well over the odds for a vital metal deliberately held in short supply.
Inevitably this will spur the opening, re-opening, or expansion of mines the world certainly doesn't need, creating even further trials and tribulations for communities across the planet, from Argentina, Bougainville and DR Congo, through Panama and Peru to the USA and Zambia, who will suffer the consequences.
To re-iterate what we wrote in January 2011: "Digging copper has long proved one of the most damaging and life-threatening activities in the extractive sector. There might be justification for mining the red metal, so long as it is used to improve peoples' lives - notably by bringing electricity to their homes ... But there's surely only one way to describe the type of purely speculative activity that currently seems to be driving the market to bullish heights. It's simply criminal"
SEC under attack for approving JPMorgan's copper ETF
11 January 2013
Eaton & Van Winkle LLP, a New York-based law firm representing US top copper consumers, is branding as "arbitrary and capricious" the Securities and Exchange Commission's (SEC) decision to approve the debated JPMorgan XF Physical Copper Trust fund.
Although the attack is not a formal appeal yet, it is likely to delay the launch of the JPMorgan copper exchange-traded fund, first publicly proposed in October 2010.
According to a document filed by Vandenberg & Feli, the previous law firm representing the consortium of fabricators, the move will "grossly and artificially inflate prices for an industrial commodity in short supply and ... wreak havoc on the US and global economy."
Opponents to the new investment product, criticized by US politicians and copper producers since its inception, say it will absorb 61,800 metric tonnes of copper.
The group, which includes manufacturers who account for nearly 50% of US copper demand as well as London-based trading house Red Kite, claim the SEC did not have sufficient evidence to conclude that the launch of the copper ETF would not affect supply of the metal.
If critics are to be believed, writes Steve Johnson for the FT.com (subs. required) the SEC "has opened the door to the widespread doctoring of the price of copper, with potentially serious ramifications for the world economy, given the metal's ubiquity in electrical wiring."
Gold ETFs have been very supportive of the price and combined these funds now hold almost 2,500 tonnes of the precious metal, but given copper's essential role in the global economy investors hoarding physical supply will have a different dynamic altogether.
According to Mickey Fulp, author of The Mercenary Geologist, since 30% of the copper stored in warehouses is not available to the market prices might skyrocket.
"The real concern here is that physical ETFs for industrial metals could be disastrous for the supply-demand fundamentals of the market. I personally do not think that this ETF is going to come about. If it does, then we will have even more manipulation of the copper market than at present. I don't think that would be good for a healthy supply-demand balance," he wrote.
In early 2012, an entity took control of up to 90% of cash contracts and inventories on the LME . Stock levels at the LME's 600 warehouses around the world are at historically low levels of 250,00 tonnes - down from 450,00o tonnes a year ago. 73,500 tonnes are also held in COMEX warehouses.
Asset management firm BlackRock Inc. (NYSE:BLK) and ETF Securities Ltd. have also said they plan to start physically backed ETFs for industrial metals in the U.S.
Copper is often referred as "Dr. Copper" for its alleged foretelling powers in signalling the health, or otherwise, of the global economy.