When You Buy Physical Commodity ETFs You're Basically Just Giving Producers A Dirt Cheap Loan

Australia Mine

A flurry of physical commodity ETFs are being launched, whereby investment in the ETFs are backed by actual physical amounts of the commodity in question.

So if it’s a copper ETF, then you can rest assured that your investment in the ETF represents ownership is actual copper somewhere, rather than just being represented by some derivatives betting on the copper price.

Wonderful, and you’d expect these products from financial firms given that easy money can be made these days A) in ETFs and B) by tapping fear of money-printing and desire for ‘hard’ assets. But then…. why might an actual commodity producer, for example Russia’s aluminium producer Rusal, be launching an ETF?

FTAlphaville’s Izabella Kaminska asks this very question:

Namely, why is it that hard-metal producers like Glencore, Rusal and even Norlisk feel the need to get into the ETF business in the first place? What business do they have in teaming up with financial enterprises in the structuring of exchange traded products?

Because they get dirt cheap (free?) financing from ETF investors… take Shell for example she highlights via a quote:

What this enabled Shell to do was to put to work some of their idle capital sitting in the form of oil either in tank, or even in the ground (where storage is free). Essentially investors loan dollars to Shell, and Shell loans oil to investors.

Bank loans pale in comparison to the deal physical ETFs offer, whereby a producer can essentially sell its product before its produced via an ETF, take the cash upfront, and then produce your commodity at a lower cost.

Ms. Kaminska describes this as the ‘elimination of the conventional banking intermediary in commodity financing’, which is true, but it’s also just a sweet deal for the commodity producers involved, especially once you factor in the potential for ETF demand to drive up the prices of the commodities they produce as well.

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