The coming copper exchange-traded funds

The February issue of TED contains an article “The effect of a copper ETF” by Ken Stier.  The SEC approved the first physical copper exchange traded fund (ETF) to be listed on the U.S. exchange.  The article outlines the pros and cons of these newly permitted financial devices.  One anticipated positive is that investment in the copper futures and options markets will drive money into the system.  However, a concern is this money will be tied up in non-manufacturing related entities that are disconnected from the actual use of copper.  Their incentives will be to derive financial gain from fluctuations in the traded value, thereby creating a potential for hoarding copper supplies to drive up the price.

Copper is a commodity that’s important in many types of manufacturing.  It’s the third most important metal after iron and aluminum.  So the potential disruption to manufacturing supplies if copper is tied up in financial instruments is realistic.  This is especially so in the electrical industry.

As manufacturers of replacement electrical contacts, Repco uses copper in AC and DC applications. Generally it's the base metal in nearly all of its components.

Wait and see attitude

The SEC’s decision to permit the establishment of ETFs is going to cause some ripples in the copper supply.  The new investment option may negatively affect tangible goods, until the “new” market reaches equilibrium and stabilizes.  However, in addition to copper, Repco also utilizes silver in its manufacturing, and is already familiar with the nature of traded commodities and their fluctuations.

So, for the foreseeable future, Repco and the rest of the electrical industry will take a wait and see attitude and expect that as ETFs “come online” there will be volatility in the price of copper.