Back in March 2010, I wrote about this situation as very few people were paying attention to the warehouses Goldman and JPM were snapping up.
- Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.
A few months later I wrote
....no worries - as long as the rainmakers make their money by "providing liquidity"... it's all good. Thankfully early in 2010 we saw news that JPM and GS were busy buying up industrial metals storehouse capacity to help make those metals dance to their own tune.... errr, provide liquidity.
Again, so predictable ....
And on to today's news:
- Goldman Sachs Group Inc. and other owners of large metals warehouses are being scrutinized by the London Metal Exchange after being accused by users like Coca-Cola Co. of restricting the amount of metal they release to customers, inflating prices.
- The board of the LME met on Thursday to discuss complaints from aluminum users and market traders, who say operators of warehouses, which also include J.P. Morgan Chase & Co. and Glencore International PLC, should be forced to allow the metal out more quickly to meet demand.
- Goldman, through its Metro International Trade Services unit, owns the biggest warehouse complex in the LME system, a series of 19 buildings in Detroit that house about a quarter of the aluminum stored in LME facilities.
- Coca-Cola and other consumers say that Metro in particular is allowing the minimum amount of aluminum allowed by the LME—1,500 metric tons a day—to leave its facilities, and that Metro could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process. (wait, I thought Goldman was only there to increase liquidity.... oh wait, thats the argument for stocks, not metals)
- Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly. Warehouses, meantime, collect rent and other fees.
- "The situation has been organized artificially to drive premiums up," said Dave Smith, Atlanta-based Coca-Cola's strategic procurement manager. "It takes two weeks to put aluminum in, and six months to get it out."
- In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street. The LME has licensed about 600 warehouses around the world.
- The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage. (thankfully there are no regulators of the anti trust variety that are not bought and paid for....)
- The warehousing issue alarmed one trader enough to seek government intervention. Anthony Lipmann, managing director of metals trader Lipmann Walton & Co. Ltd., gave evidence to the U.K. House of Commons Select Committee in May 2011, raising concern about large banks and trading houses owning facilities that store other people's metal.
- It also has raised questions about how they handle the materials, said Edward Meir, senior commodity analyst at MF Global. "Who's watching over situations involving whose metal is getting in and out first?" said Mr. Meir. "Who has priority?"
- Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months. Metro charges its customers 42 cents a day for storing one metric ton of aluminum in Detroit, which is about the industry average. At 900,000 tons in the warehouses, Goldman is earning $378,000 a day on rental costs, or about $79 million in seven months. (that's yet another good incentive to keep the product warehoused as long as possible)
- "Warehouses are making a lot more money," said Jorge Vazquez, managing director of aluminum at Harbor Commodity Research. Goldman is "really the winner clearly, because if you want to take metal away from the location, you have to wait up to 10 months to get your metal out, and in the meantime you're paying rent."
- "The system is set up like a funnel, so you can dump large amounts of metal in the front end and only get a little out at the back end," said David Wilson, director of metals research at Société Générale SA. "It enables a situation where the rules of the warehousing system are taken advantage of." (this is what our top business grads sit around all night thinking about - clearly helping society by focusing their talents on such issues)
- The situation is made more aggravating for metal consumers because supply has far outweighed demand for most of the last decade, and there is more than 4.5 million metric tons of surplus metal stored in LME's warehouse system.
[LME's Copper & Aluminum, 50-80% of Nickel and Zinc, and 40-50% of Tin]
[Jul 1, 2010: Drunk British Trader Moves Oil $1.65 Single Handedly]
[Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]
[Apr 28, 2008: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin]