No more than a short-term impact, Goldman rules on ETFs

Physically-backed exchange-traded funds (ETFs) in base metals will not affect prices in the medium to long term because investors will sell back to the market if tightness appears, according to research by Goldman Sachs

Physically-backed exchange-traded funds (ETFs) in base metals will not affect prices in the medium to long term because investors will sell back to the market if tightness appears, according to research by Goldman Sachs.

The products could cause short-term changes but the impact will differ across the base metals, with aluminium, nickel and zinc looking largely immune, the investment bank said on Tuesday.

A copper ETF could, however, expedite a backwardation in the market and increase volatility, it added.

Its analysis comes as interest in physical base metal ETFs accelerates. Some see their arrival in physical base metals as just another element to be understood and factored into the market, while others are sceptical about the repercussions.

It emerged this week that JP Morgan plans a physically-backed ETF in copper.

“Physical base metal-backed ETFs continue to be a key topic of interest, as many see these products as ‘new demand’ that could change fundamentals, and therefore price […],” Goldman analysts said in a research note.

“However, we believe that any meaningful impact would not be sustained beyond the short-term as resulting market tightness would quickly generate incentives for investors to sell the metal back into the market,” they said.

For an ETF to significantly impact prices on a longer-term basis, the fund would need to “tip the balance of spare capacity and inventory availability”, and accumulated stocks would have to be removed from the market permanently, according to Goldman.

If a copper or nickel ETF were to disrupt the market it would have to be equivalent to over 50,000 tonnes of material, the bank said, a figure that equates to 13% of all London Metal Exchange-bonded copper stocks and 39% of nickel stocks.

An aluminium ETF would need well over a million tonnes, 23% of LME-listed stocks, while a zinc ETF would need more than half a million; over 82% of LME stocks.

“Looking across metals, we don’t see potential for a fundamental disruption from a physical ETF in aluminium, nickel or zinc […,],” the analysts said.

“However, a physical ETF in copper might exacerbate short-term volatility and perhaps bring forward our forecasted deficit and extremely tight, backwardated market,” they added.

The JP Morgan fund will issue 6.18 million shares, equivalent to 61,800 tonnes of copper, based on the official spot price of $8,086.75 per tonne on October 7.

ETF Securities recently announced plans to launch ETFs across all base metals.

Three-month copper settled at $8,473.5/474.5 in Tuesday’s official trading on the LME, after opening at $8,480.5 per tonne.

What to read next
Chinese mining giant CMOC reported a 178% year-on-year increase in cobalt metal production for the first six months of 2024, according to an announcement by the company on Friday July 12
Aluminum scrap generation in Europe is expected to decrease in the current quarter due to lower demand from downstream metal producers amid the domestic seasonal summer slowdown, according to the latest market overview from the Bureau of International Recycling (BIR)
The US government will impose tariffs on steel and aluminium shipped from Mexico that were made elsewhere, in a bid to curb trans-shipment and excess production, the White House said in a statement on Wednesday July 10, a move widely applauded by the pair of metals industries
Norway-based aluminium producer Hydro and German car manufacturer Porsche signed a long-term agreement on Tuesday July 9 for supply of low-carbon aluminium to further decarbonize the supply chain of Porsche’s sports cars. The agreement follows the letter of intent signed in April
The Indonesian government is looking to ease its export ban on bauxite, sources familiar with the matter have told Fastmarkets
Price and supply were the major topics of conversation for market participants across the value chain attending Fastmarkets’ flagship Lithium Supply and Battery Raw Materials conference in Las Vegas on June 24-27