Who Cornered the Copper Market? (JPM, JJC, COPX, SCCO, FCX)

Copper is supposed to be one of the leading economic indicators.  As demand rises, it translates to project building and industrial expansion in the months ahead.  After all, it is a common base metal used in more industries than can easily be counted and they have to order it before they can build things.  So what happens when you get a Hunt Brothers’ equivalent run on copper?  That is what we supposedly have now, with one single trader hoarding the world’s copper.

Reports were out on Tuesday and Wednesday that a single trader held something to the tune of 80% to 90% of the physical copper held in the U.K.  The WSJ noted this morning, “…a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world’s exchange-registered copper stockpile and worth about $3 billion.”

J.P. Morgan Chase & Co. (NYSE: JPM) had a large position, but chatter on the street is that J.P. Morgan is not the copper king.

The problem is that this is going above and beyond copper.  The WSJ further noted that single traders also dominate as much as 90% of the exchange’s aluminum stocks; and 50% to 80% of the stockpiles of aluminum alloys, nickel, and zinc may be held by single traders.

Much may be based upon a new copper ETF product coming out in 2011 and that is part of why some believed that it was J.P. Morgan behind the copper corner.

There are already a couple of copper ETFs.  There is the ETFS Physical Copper from ETFS Securities, but that trades in London.  In the U.S. there is iPath DJ-UBS Copper Trust Sub-Index ETN (NYSE: JJC), but that is largely comprised of futures and swaps and includes the contract in COMEX. Its market cap as of yesterday was $210+ million.  iPath also has several other industrial metal ETN products for Aluminum, Lead, Nickel and Tin.  Lastly, there is the copper mining companies ETF called the Global X Copper Miners ETF (NYSE: COPX) which invests in securities and depositary receipts that comprise the the Solactive Global Copper Miners index.

Southern Copper Corp. (NYSE: SCCO) closed at $48.56 on Wednesday, and while the high was $48.62 on Tuesday that is the record closing high this year. Actually, that may be an all-time high.  The company has refining mineral properties in Peru, Mexico, and Chile, and its market cap appears to be north of $40 billion now.  Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) closed at $116.39 yesterday and its 52-week trading range is $56.71 to $117.40 with a market cap approaching $55 billion.

To insure competition, global regulators are supposed to keep multiple producers from garnering this much control of the production and sale of any commodities.  Why should a trader who may not even have an underlying use other than speculation be allowed to hold 90% of ANY market?

The LME is supposed to have rules that prevent single traders from cornering a market. Interestingly, that police effort is based upon making traders who dominate the metals maintain ample supplies at low margins for the short-term.  That isn’t good enough.  How the exchange even allows this is a sham.

JON C. OGG