The securities arm of JPMorgan Chase & Co. acquired a large chunk of the world's copper inventories, underscoring a sharp rise in investor interest in the metal amid fears of a global shortage.
A source close to JPMorgan said the New York bank bought about 50 per cent of copper stockpiles at official London warehouses on behalf of clients. The purchase, which was reported in the Wall Street Journal on Tuesday, comes as new exchange-traded funds devoted to the commodity come to market. Those funds will put more pressure on copper supplies at a time when production is already expected to fall below demand from construction, industry and other users.
The launch of the new ETFs are one factor behind the soaring price of the widely-used metal, which hit a record of $4.09 (U.S.) per pound on the London Metal Exchange Tuesday. Some analysts predict that it will surpass $5 next year.
More investors are turning to hard assets as a hedge against rising government debt and inflation and a resulting drop in currencies. In addition to buying copper on behalf of clients, JP Morgan is among a group of firms preparing to launch a copper ETF, alongside Blackrock Inc. and London's ETF Securities Ltd. A JP Morgan spokesperson declined to comment on the purchases Tuesday.
Copper, which is used in everything from power to construction to cars, has long been viewed as a reliable barometer of global economic activity - hence the moniker "Dr. Copper." Rapidly industrializing China is the world's single biggest consumer of the metal and accounts for most of the growth in global demand, which is projected to rise by 9 per cent this year, up from four per cent growth last year.
But the growing investor demand for copper and precious metals ETFs may be skewing copper prices, because the metal is no longer one that is bought almost exclusively for industrial use.
The expected flood into copper ETFs would increase the pressure on an already tight market for the metal. Supply from copper mines around the world is only expected to increase by 1.5 per cent this year, which has sent prices soaring. The price of copper is up 20 per cent this year.
Copper demand is expected to outpace supply next year for the first time in four years and over the next two years stocks could fall to their lowest level in three decades, according to a new report from TD Newcrest.
Supply Challenges
Copper prices rose at the start of the year to around $3.60 in April before falling to $2.76 in June on concerns of a double dip recession in the U.S., Europe's debt woes and a slowdown in growth in China.
However, prices have steadily increased since the summer, driven by supply concerns, renewed demand forecasts and a new wave of investor interest.
Miners scaled back production during the global recession, and as the economy has improved, they have worked to boost output.
In addition, there has also been a cut in production due to labour unrest, particularly in Chile, the world's largest copper-producing country. A month-long strike is set to end at Anglo American Plc and Xstrata Plc's Collahuasi mine in Chile, the world's third-largest copper mine.
The ongoing supply challenges are also fuelling the rising prices.
"We believe that there is potential for the copper market to experience a period during which scarcity pricing takes hold," TD analyst Greg Barnes said in his report, while also calling for copper to surpass $5 next year "at least for a short period."
"A co-ordinated global recovery and/or a supply crisis (widespread labour action in Chile, large physical ETF demand, a major mine production problem, etc.) would be the ingredients required, in our view, for a very high copper price to occur," the report said.
Tuesday's record copper price is also believed to be driven by U.S. Federal Reserve chairman Ben Bernanke's forecast earlier this week that America made need another dose of quantitative easing to avoid its economy falling back into recession.
That news also helped send the price of gold, the ultimate safe-haven commodity, to a record on Tuesday.
Investors are now starting to latch on to copper for the same reasons, believing the physical investment is a safe alternative to more volatile equities, in particular when supply shortages are expected. That has spurred the coming onslaught of ETF investments expected to be launched as early as this week.
"It's another new element of demand for copper in an already tight market," said Patricia Mohr, commodity market specialist at Scotiabank, who also sees copper hitting $5 next year.