It bears the atomic number 29, and you may think of it as a boring element. But copper is also one of the best conductors of electricity. And in today's world, that means it's found in just about everything.
From the electrical wiring of new homes to countless applications in vehicles (nearly 1 mile of wire alone in every vehicle -- even more for hybrids), to the basic component of circuit boards -- this is a ubiquitous commodity that helps us maintain our high-speed lifestyles.
All told, the world uses 15 million tonnes of copper every year. And its growth shows no sign of slowing.
Yet according to a recent New York Times article, recent moves by the SEC loosening regulations on JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and BlackRock (NYSE: BLK) have the potential to disrupt the market as it exists today -- or send the price of everything that uses it soaring.
First, what exactly do they want to do?
A few years ago, JPMorgan, Goldman Sachs, and BlackRock were looking for a way to buy about 80% of copper available on the market. They wanted to set up ETFs that would track the price movements of the commodity, backed up by real, physical assets. It's a way for companies to hedge exposure to copper, as well as a way for others to invest in it.
And it makes sense, especially with a commodity like copper. I already mentioned how copper is used in virtually everything we use today. But that's not all -- demand for the metal is soaring in China. In fact, demand there has tripled in the past 15 years alone.
And although the stocks of leading copper miners Freeport McMoRan (NYSE:FCX) and Rio Tinto (NYSE:RIO) tend to rise alongside the price of copper, some of these banks' clients need a more direct way to access the commodity -- without worrying about the added business risk those companies bring (like, for instance, their respective $21 billion and $26 billion debt loads).
In December, the SEC granted approval for these copper funds, despite opposition from economists and companies that regularly use copper.
Unfortunately, the reality is that, as with all commodities, the market price is a function of supply and demand. If demand is growing, and supply is constricted (as it could be if holed up in warehouses owned by investment banks), it's inevitable that the price would shoot up.
A potentially lucrative move for the banks and their clients, yes. But one that could dangerously send the cost of most consumer electronics soaring.
And this is a tactic these firms have used before. The New York Times article focuses on a somewhat similar strategy to what Goldman Sachs employs in the aluminum market, except instead of owning both the copper and the storage warehouses, they own only the warehouses.
The author explains how -- according to insiders -- the sole job of the company's truck drivers and warehouse employees is to take part in an "industrial dance" shifting aluminum from one warehouse to another.
This "lengthens the storage time," adding "millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal."
And while it contributes only a fraction of a penny to the end product consumers purchase, when you add it up over billions of aluminum cans sold each year, you're looking at $5 billion straight from consumers' pockets and into those of Goldman Sachs and other financial firms over the past three years alone.
But it's not only aluminum.
Goldman, JPMorgan, and Morgan Stanley (NYSE:MS) have a presence in all the major commodity markets: oil, wheat, cotton, you name it. This is big business, from which the top 10 banks derive about $6 billion in revenue, according to Bloomberg.
And although the Federal Reserve permitted JPMorgan to trade in commodities, the same 2005 ruling that granted that permission expressly forbade them "to own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities."
Yet until recently, the Fed has turned a blind eye to these events. Luckily, the Senate Banking Committee recently held hearings on these allegations. The Fed followed suit, announcing plans to review previous rulings on what fine line banks are permitted to walk as it relates to commodity trading and ownership.
For now, things are at a standstill. But the Senate Banking Committee will reconvene in September on the matter, hearing testimony from the Fed and the major banks.
Should investors in these Wall Street banks be worried? Hardly. As big as they are, these side commodity businesses still amount to just a small fraction of the companies' overall revenue. And depending on how the Senate Banking Committee and the Fed decide, the banks are likely to alter their strategy to cooperate within the lines of the law.
But as consumers, let's hope the Senate puts an end to this madness -- before the prices of our cell phones, televisions, and new cars go straight through the roof.