NEW YORK (Reuters) - U.S. copper fabricator Southwire Co dropped its legal fight against physical copper funds planned by Wall Street banks, as political and regulatory scrutiny make it unlikely the exchange-traded funds will ever be launched, according to a court filing on Monday.
Southwire filed the lawsuit eight months ago after JPMorgan Chase & Co (JPM.N) and BlackRock Inc (BLK.N) got approval from the U.S. Securities and Exchange Commission for the first U.S. funds that would use copper as collateral against shares.
The prospect of the copper ETFs had spooked industrial users who worried the funds would hoard a vast stockpile of metal off the market, starving them of raw material and driving up prices.
At the same time, U.S. politicians called for more regulation and scrutiny of the multibillion-dollar commodity trading businesses of Wall Street banks. JPMorgan and others are now trying to sell off those businesses.
The dramatic change in circumstances surrounding the funds and their owners have make it less likely than ever that they would be launched, said Monday’s filing to the U.S. Court of Appeals in Washington, D.C.
“Rapidly changing market conditions now make it unlikely that the orders being challenged will lead to the listing and trading of shares,” said Robert Bernstein, an attorney at law firm Eaton & Van Winkle LLP which represents Southwire.
JPMorgan and BlackRock declined to comment. The SEC did not respond to requests for comment.
Southwire, one of the biggest copper users in the United States, said it still believes the funds would inflate prices and constrict supplies of the metal used for plumbing and electrical wire if they were launched.
But mounting political and regulatory scrutiny of Wall Street banks’ involvement in the physical commodity trading, particularly the ownership of metals warehousing firms, has cut the chances that the funds would be ever launched.
On the regulatory front, the Federal Reserve is reviewing its oversight of Wall Street’s commodity trading business and the London Metal Exchange is dealing with a crisis over its warehousing policy.
“Today the situation is very different,” Bernstein told Reuters.
Doubts emerged about whether JPMorgan would push ahead with its JPM XF Physical Copper Trust after the bank put its commodities business, including warehousing unit Henry Bath which would store the fund’s metal, up for sale this summer, Bernstein said.
For BlackRock, its plans were complicated when Goldman Sachs Group Inc (GS.N) pulled its Metro warehousing unit as custodian for the product, he said.
Neither firm has published a final prospectus for the funds with the SEC. JPM got the green light in December last year and BlackRock in February this year.
The furor over the funds has also waned as market conditions have deteriorated.
In late 2010, many analysts attributed copper’s surge to over $10,000 per ton from $6,000 to news of JPMorgan’s fund while China’s appetite for metal was red hot.
That is dramatically different now.
The copper market is in surplus; doubts remain about long-term demand growth from China, the world’s No. 1 metals user and commodities have fallen out of favor with investors.
“I’m not seeing the basis for a compelling argument for launching an ETF right now. It might come back in the future. But right now it’s come and gone,” Bernstein told Reuters.
Reporting by Josephine Mason; Editing by Marguerita Choy and Lisa Shumaker