* Copper proving popular choice for base metal ETF plans
* Downsides could include wild price distortions
LONDON, Oct 27 (Reuters) - Launching physically backed copper exchange traded funds (ETFs) will be popular, but could face hurdles as supplies for the red metal tighten, Credit Agricole said on Wednesday.
Talk that physically backed exchange-traded products (ETPs) in industrial metals are imminent has dominated base metals markets in recent months, generating speculation about their effect on prices and demand. [ID:nLDE68J0R6]
Several firms have put forward plans for base metal ETPs over the past month, with copper proving a popular choice.
JPMorgan Commodity ETF Services (JPM.N) registered to launch an ETP for copper in a filing late last week with U.S. regulator the Securities and Exchange Commission. [ID:nLDE69O174]
“In theory copper would be the one everybody wants because of the tight fundamentals, the exposure to China,” Robin Bhar, analyst at Credit Agricole, said after a media briefing.
“The practicalities are a different matter. There are very low stocks and the stocks that are available are tightly held,” he told Reuters.
Copper, which is used in power and construction hit its highest since July, 2008, at $8,554 a tonne on Tuesday and was at $8,304 at 1216 GMT.
Supply shortages have been a major factor behind the surge in copper prices due to a combination of falling ore grades in major producing nations, labour problems and project delays.
Copper stocks in London Metal Exchange warehouses have been falling, down more than 30 percent since February when they touched around 555,000 tonnes. “If you were using LME metal it would come under the LME lending guidance,” Bhar said.
At the LME annual dinner this month, the exchange’s chief executive said large physical base metals positions held by ETPs could be subject to the exchange’s lending guidelines. [ID:nLDE69C0ID]
BlackRock Asset Management (BLK.N) has also joined the race to provide a copper ETP to institutional and retail investors, filing its own offering on Tuesday. [ID:nN26444469]
Earlier this month, UK-based ETF Securities said it would launch ETPs for base metals, while producer RUSAL (0486.HK) said its aluminium-supplied ETF would hit the market within three months. [ID:nLDE69A0I5] [ID:nLDE69D1PN]
Metal analysts say ETPs could help drive copper prices higher by attracting new investors, many of whom, until now, have had few opportunities to invest directly in the metal.
Deutsche Bank has said a physical copper ETP could account for between 300,000 and 400,000 tonnes of demand. [ID:nLDE69A162]
Bhar said downsides could include significant warehousing costs, price distortions and the potential for market manipulation. “Experiences from the platinum market suggest that the impact from an industrial metal ETF, if it takes hold, will be to amplify the volatility in prices, particularly around turning points in the supply/demand balance,” he said.
It took ETF Securities nine months to get approval for their U.S. platinum and palladium ETPs. [ID:nN07368852]
“Will there be a regulatory backlash against base metal ETFs should they keep valuable supplies away from the market, or if consumer prices become unaffordable?” Bhar added.
Editing by Keiron Henderson