Copper ETFs Are A Big Deal … Sorta

December 09, 2010

I agree, Matt, that the proposed physical copper ETFs are uninspiring, but their presence will be felt.

Copper is a huge market. Gargantuan, really. Preliminary figures from the International Copper Study Group, a multinational trade group based in Lisbon, place last year’s total worldwide refined copper production at 18.36 million metric tons. (In comparison, last year’s global gold supply totaled only 4,042 metric tons, according to figures from the World Gold Council.)

Most of that supply, however, is taken up by existing sources of demand: copper pipes for new houses; wires for electronic circuitry; even innards for new cars and trucks. According to the ICSG, last year’s total copper demand came to 18.19 million metric tons—which, if you run the numbers, means just 167,000 metric tons was left over.

For a market as large as copper, that’s a pretty tight supply/demand balance. And it’s only going to get tighter.

Finding new sources of copper has become increasingly tough, and the quality of the copper we can still pull from the ground has declined substantially—so much so that BHP Billiton has predicted a 10 percent drop in production at the world’s largest copper mine, Escondida, as a result.

Meanwhile, our thirst for copper worldwide has only grown. Infrastructure build-outs and expansion of manufacturing in emerging markets like China—which uses two out of every five tons of copper mined—have more than taken up the slack left by developed nations. And while the Chinese, who have raised interest rates and curbed lending, might finally be slowing down, their slack will in turn be taken up by India and Brazil. And let’s not forget that Brazil has a World Cup and Olympic Games to prepare for.

With a supply/demand story like that, no wonder everyone from Barclays to Goldman has advised their investors to get into copper ASAP. Indeed, we’re starting to see the tightening play out in the market: The ICSG estimates that for the first eight months of 2010, copper demand actually outweighed available supply by 356,000 metric tons. As a result, global exchange inventories of the metal have plummeted 22 percent so far this year—their lowest point since last October.

Starting to get the picture?

OK, now let’s add into this equation an ETF. Or three.

We don’t have details yet from ETF Securities on how large their physical copper trust will be, but, if approved, the J.P. Morgan Physical Copper Trust would take 61,800 metric tons of metal off the market, while the iShares Copper Trust would soak up another 121,000 metric tons. Together, those two ETFs represent over half the inventory currently available on the London Metals Exchange, which as of today sits at about 349,500 metric tons.


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