Why doesn't India have copper ETFs?

Hello folks, you're tuned into Franchard Staley.

In today's episode, we talk about corporate ETFs and why India doesn't have them even

though they exist globally.

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Now back to the story.

Copper is named Doctor Copper for a reason.

It's known to be a very good parameter of the world's overall economic health because

it's used across so many sectors, construction, manufacturing, automobiles, electrical equipment

and now even AI data centers.

So when copper prices go up, it usually means demand is strong and you can tell that people

are optimistic about future economic growth.

But when prices fall, it can signal a slowdown in the economy.

This ability to reflect economic growth or downturns is what gives copper, it's so

called PhD in economics, hence Doctor Copper.

But here's a thing, Copper may be a good economist, but it's also a moody one.

Because while it reflects the economy, it's also incredibly volatile.

And right now it's behaving exactly like that.

After reaching an old time high of $13,000 per metric ton on the London Metal Exchange

in Jan this year, Copper has now fallen about 10% since the US-Israel war with Iran

began on February 28th.

At first this makes sense, war pushes up energy prices, higher energy costs slowdown economies

and when economies slow, industries cut back.

They use less copper so demand falls and prices follow.

But the confusing bit is that the same conflict is also disrupting supply.

You see, copper production depends on sulfuric acid, which in turn depends on sulfur, much

of which moves through the state of hormones.

With disruptions in that region, the supply chain has taken a hit, which means less copper

production and that should push prices up.

So now you have two forces, demand and supply, pulling the metal in opposite directions.

And Doctor Copper, caught in the middle, is doing what it does best.

Swinging back and forth, trying to make sense of a world that isn't giving it clear signals.

But that isn't stopping investors from looking at Copper.

Historically, gold was the acid investors rushed in times of uncertainty and more recently

silver is also attracted significant interest.

But now, investors are looking to diversify it beyond these traditional metals and are

turning to alternatives like copper.

And falling copper prices may be one reason why investors wanted to depend on this opportunity,

especially since the metal has rallied about 30% of the last year.

Sure, that's not as much as gold's 80% rally.

Silver's 155%, platinum's 120%, or palladium's 75% of the same period, but it's still

sparking interest.

Because going ahead, both India and the world could demand copper in quantities that mining

and recycling may not be able to supply fast enough.

For context, according to a recent NETIO report, India's cumulative demand for copper could

exceed 20 million tons by 2050, up from current domestic consumption of nearly 1 million

tons.

That's why policy makers are pushing for more investment in domestic mining to reduce

import dependence.

Now put all of this together and you'll see why copper starts to look attractive.

So naturally, you'd expect a simple investment option to exist like a copper ETF, a fund

that trades like a stock but tracks copper prices.

But here's a catch.

India doesn't have one and that might seem surprising because in global markets like

the US and Europe, copper ETFs are already a thing.

Some track copper prices through futures contracts like the United States copper index fund.

They don't hold physical copper.

Instead they simply mirror the price of copper traded on major global exchanges, essentially

betting on where prices will go.

Others invest in copper mining companies giving indirect exposure to the metal.

For example, the global ex copper minus ETF.

This products work because global exchanges like the LME and the Chicago Mercentile Exchange

are highly liquid, with large institutions such as banks, hedge funds and pension funds

constantly buying and selling.

This makes trading smooth and prices more stable.

They also benefit from strong infrastructure status, well developed warehouses and standardized

contracts with clear rules for how futures are settled.

And all of this makes it easier and cheaper to design and run an ETF that tracks copper.

In India, however, it's a very different story.

Indian commodity ETFs such as gold and silver are largely physically backed, meaning the

fund holds actual metal in regulated vaults.

And since gold and silver ETFs dominate the commodity ETFs based in India, a large share

of assets sets in physically backed products.

Such ETFs work beautifully because metals like gold are compact and valuable.

A small world can hold a massive amount of wealth.

The copper?

Not so much.

It is bulky and relatively low in value per kg.

This means that to create a physically backed copper ETF worth, say, a hundred crore

pays, you need hundreds of metric tons of metal.

That translates into massive warehouses, constant quality checks, insurance and logistics

costs.

Also, copper isn't as stable as gold.

It can oxidize, degrade and needs more careful handling.

All this adds to the cost and these costs can aid into investor returns making copper ETFs

less attractive.

Not just that.

Taxes also make things harder.

Gold and silver attract a GST of around three percent, but for copper, that's around

18%.

Now, you don't pay GST even buying an ETF, but if a copper ETF were physically backed,

every purchase and movement of the metal would come with a much higher embered cost.

Over time, that can drag returns or make the ETF less efficient.

Which explains why, unlike gold, a physical copper ETF in India becomes economically unviable.

But you could argue that if physical storage is difficult, the obvious alternative is a

future's based ETF, like the ones that exist globally.

But here's the issue.

India's commodity futures market, especially for copper, is still dominated by short-term

traders rather than long-term hedgers or large institutions.

This can lead to patchy liquidity and sharper price swings driven by speculation.

And regulators don't love that.

For an ETF to work well, you need stable, reliable prices' coverage.

Otherwise, investors could end up tracking something that doesn't behave like the real

copper market.

There's also another problem.

Most global copper pricing is tied to international benchmarks like the LME, but Indian regulators

have traditionally been cautious about local products relying to heavily on foreign benchmarks.

Their concern is that if an ETF in India depends entirely on an overseas benchmark, it could

import volatility from abroad.

There are also questions around control like what happens if there's a disruption or

manipulation in the foreign market.

That's why gold and silver ETFs in India rely on domestic benchmarks like MCX-based

indices or multi-commodity exchange, which are clearly defined and closely monitored.

Copper and contrast, lacks a transparent, sevy-decognized domestic spot price that can

serve as a reliable benchmark for an ETF.

So you can see why the futures' rule doesn't stay forward.

This is precisely why Indian investors are trying to get exposure to copper through various

workarounds.

Even with, there are copper mining and metal sector stocks whose fortunes are tied to

copper prices.

This gives investors equity exposure to the metal, but the drawback is that these stocks

can underperform copper prices due to cost overruns, mismanagement or other company-specific

issues.

Many mining companies such as Vedanta also produce other metals which can dilute the

impact of rising copper prices.

On the flip side, they can also outperform copper if they manage to expand production during

a price rally and may also offer dividend income.

Another option is trading copper futures on MCX where investors can take direct exposure

to copper prices, but this comes with significant risks.

Future involves large gains and losses along with daily market-to-market adjustments.

This means that if copper prices fall sharply, losses are reflected in your account immediately,

sometimes within a single day.

You may also be required to add more margin quickly or your broker could square off your

position.

Combined with copper's high volatility, this makes futures more suitable for active traders

than for casual or long-term investors.

And finally, there are global copper ETFs.

Some overseas investing platforms allow Indian investors to buy global commodity ETFs including

copper.

Either through international brokers or via the liberalized remittance scheme or LRS,

which permits individuals to remit up to $250,000 per financial year, including for investments

abroad.

But this route comes with its own challenges, exchange rate risk, additional compliance

and higher transaction costs.

But none of these are as simple as buying a domestic copper ETF, which makes you ask,

is India ready for one.

Well, maybe not quite, for a corporate ETF to work in India, a few things need to fall

into place.

First, the futures market needs to deepen with more institution participation and stable

pricing.

Second, regulators may need to allow smarter structures such as building a strong domestic

copper spot benchmark they trust or formally permitting ETFs to use an international

copper index as their base.

Third, taxes and logistics need to become more favorable.

And finally, there needs to be consistent investor demand.

Because at the end of the day, no fun house will launch a product unless it believes there

is enough scale.

But until that happens, copper ETFs will remain one of those things that feels like it should

exist in India, but doesn't, despite having all the makings of a compelling investment

story.

Thank you for listening to today's episode.

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Until next time.