Before the 1980s, banking institutions weren’t allowed to own non-financial businesses — Congress wanted to reduce the risks banks take, as well as safeguard depositors. However, in the 1990s, Congress and the Federal Reserve’s rules were relaxed, soon permitting some banks to develop businesses in storing and transporting commodities.
In 2010, Goldman Sachs bought Metro International Trade Services, one of the US’s biggest metal storers, housing over a quarter of the aluminum on the market. Goldman is making a pretty penny from their new endeavor, mainly by shuffling the millions of 1,500-pound metal bars between the 27 warehouses that make up Metro International; moving the bars between warehouses more often than actually delivering any.
Goldman’s shuffle takes advantage of pricing regulations made by overseas commodities exchanges, like the London Metal Exchange (LME); and a will to influence various commodities markets, a benefit of liberal federal regulations. Loading and unloading the bars allows for more storage time, which fattens the pockets of Goldman, since the banking institution owns Metro International and charges manufacturers and metal owners rent to house the metal. Goldman’s shuffle ultimately adds to prices paid by manufacturers and consumers, regardless of whether the metal came from Metro International or not.
Industry rules obligate metal warehouses to move at least 3,000 tons of metal per day; and while Metro complies with the rule, most of its stored metal is shifted between warehouses, and not actually delivered. Metro charges rent by the day for housing metal; storage costs are a key part of the “premium”, affixed to the price of all aluminum on the market. Since 2010, due to Metro’s long delays, premiums on all aluminum in the market have doubled. Extended delays mean higher price tags for everyone, even if the metal doesn’t pass through Metro.
This past August, Goldman Sachs and JPMorgan Chase’s expensive aluminum storing and delivery practices were called into question by the Commodity Futures Trading Commission (CFTC), an independent agency of the federal government that regulates futures and option markets.
The CFTC believes that some Wall Street Banks have falsely inflated the prices ofaluminum and other metals stored in their facilities, in order to make a buck (or well over a buck) from end users and consumers. The CFTC sent subpoenas to firms like JPMorgan and Goldman — as well as Metro International — requiring them to present recordings of their commodities operations from January 2010 and onward.
Both JPMorgan and Goldman have denied the allegations, maintaining that customers don’t face a wait time, and would receive shipments immediately. They also noted that delayed deliveries were due to client orders and not the firms themselves.
Before the CFTC caught wind of LME’s warehouse issues, in July, the LME announced a proposal to alleviate the bottlenecks at warehouses, and that LME would take until October to fully consider the proposal; in the meantime, the exchange would confer with industry producers, consumers, traders and officials. However, two major aluminum companies, Alcoa and Russia-based United Co. Rusal, have expressed staunch opposition to LME’s proposal.
If LME’s new warehouse rules are enacted, then both Alcoa and Rusal stand to lose a great deal of profits. The bottlenecks are doing two things: permitting warehouse owners to charge more rent, while also allowing for inflated premiums. Current premiums — a surcharge that producers expense, on top of the metal’s price, to buyers for handling, insuring and delivering aluminum — are at maximum levels. In the late-2000s, premiums were averaging around six cents per pound, while this past July, premiums were at a record high of 11.75 cents per pound.
Prices for aluminum have dropped 44% since 2008; decreased premiums would cut into huge profits that aluminum companies have depended on since 2010. It is suspected that since the first quarter of 2011, Alcoa has made almost $1.7 billion from aluminum premiums, $649 million more than the company would have made if current premiums were at six cents per pound, as they were in the late 2000s. Though LME was set to decide on its proposal in October, the exchange has yet to make a decision. If the proposal goes into effect, analysts believe that premiums could recede by almost a third. With the proposal, Alcoa stands to make only $350 million this year.
Industry experts note that if premiums regress to the six cent average, then that would actually be better for the aluminum industry — the industry could sustain itself long-term. Cutting back on aluminum premium profits would obligate aluminum companies to economize production by shutting down barely lucrative smelters, ultimately shrinking supplies. A reduction in supplies would bolster aluminum prices. In November, LME officially set new guidelines that obligate LME warehouses to ship out more metal than they receive, for deliveries with 50+ day wait times. Hopefully these guidelines will resolve the massive bottlenecks that are continuing to occur. The new rules begin on April 1.
Developed and Written by Dr. Subodh Das and Tara Mahadevan.
Dr. Das is a prolific writer and a well-recognized and respected expert and consultant to the global aluminum industry specializing in the areas of industry trends, technology, recycling, manufacturing, carbon management and new product & process developments.