Growing Fury Over Goldman's New Money Machine - 'Metals Warehouses Make A Mockery Of The Market'
LME traders are furious and demanding an end to the inflationary practice by the Squid.
With Reuters permission, we are excerpting half of the investigative report. It is worth reading in full at its source.
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By Pratima Desai, Clare Baldwin, Susan Thomas and Melanie Burton
(Reuters) - In a rundown patch of Detroit, enclosed by a cyclone fence and barbed wire, stands an unremarkable warehouse that investment bank Goldman Sachs has transformed into a money-making machine.
The derelict neighborhood off Michigan Avenue is a sharp contrast to Goldman's bustling skyscraper headquarters near Wall Street, but the two operations share one important element: management by the bank's savvy financial professionals.
A string of warehouses in Detroit, most of them operated by Goldman, has stockpiled more than a million tonnes of the industrial metal aluminum, about a quarter of global reported inventories.
Simply storing all that metal generates tens of millions of dollars in rental revenues for Goldman every year.
There's just one problem: only a trickle of the aluminum is leaving the depots, creating a supply pinch for manufacturers of everything from soft drink cans to aircraft.
The resulting spike in prices has sparked a clash between companies forced to pay more for their aluminum and wait months for it to be delivered, Goldman, which is keen to keep its cash machines humming and the London Metal Exchange (LME), the world's benchmark industrial metals market, which critics accuse of lax oversight.
Analysts question why London's metals market allows big financial players like Goldman to own the warehouses which store huge quantities of metal even as they trade the commodity.
Robin Bhar, a veteran metals analyst at Credit Agricole in London says the conflict of interest is so acute he wants U.S. and European anti-trust regulators to weigh in.
"I think it makes a mockery of the market. It's a shame," Bhar said. "This is an anti-competitive situation. It puts (some) companies at an advantage, and clearly the rest of the market at a disadvantage. It's a real, genuine concern. And I think the regulators have to look at it."
Goldman said its warehouse subsidiary Metro International Trade Services has done nothing illegal, and abides by the LME's warehousing rules. "Producers have chosen to store metal in Detroit with Metro," a Goldman spokeswoman said. "We follow the LME requirements in terms of storing and releasing metals from our warehouses."
The London Metal Exchange defends its rules. "There is a perception that consumers have not been able to get to their metal when the reality is that it is big banks, financing companies and warehouses that are not able to get to their huge tonnages of metal fast enough," said LME business development manager Chris Evans.
BUSINESS MODEL
Goldman's warehouse business relies on a lucrative opportunity enabled by the LME regulations. Those rules allow warehouses to release only a tiny fraction of their inventories per day, much less than the metal that is regularly taken in for storage.
The metal that sits in the warehouse generates lucrative rental income.
Little wonder that so many want in. Metro was acquired by Goldman in February 2010, while commodities trading firm Trafigura nabbed UK-based NEMS in March 2010, and Swiss-based group Glencore International acquired the metals warehousing unit of Italy's Pacorini last September.
Henry Bath, a warehousing firm and founding member of the London Metal Exchange in 1877, has been owned for about 40 years by traders or banks including Metallgesellschaft in the 1980s and failed U.S. energy trader Enron at the turn of the century. It now comes under the umbrella of JP Morgan, which bought the metals trading business of RBS Sempra Commodities in July last year.
Despite its rental income, Goldman's warehouse strategy apparently hasn't been enough to snap a slumping performance in commodity trading, with the company reporting a "significant" drop in revenues from a year ago in its latest quarter, the sixth time in the past 10 quarters that it has failed to expand.
CONSUMERS FUME
The long delays in metal delivery have buyers fuming. Some consumers are waiting up to a year to receive the aluminum they need and that has resulted in the perverse situation of higher prices at a time when the world is awash in the metal.
"It's driving up costs for the consumers in North America and it's not being driven up because there is a true shortage in the market. It's because of an issue of accessing metal ... in Detroit warehouses," said Nick Madden, chief procurement officer for Atlanta-based Novelis, which is owned by India's Hindalco Industries Ltd and is the world's biggest maker of rolled aluminum products. Novelis buys aluminum directly from producers but is still hit by the higher prices.
Madden estimates that the U.S. benchmark physical aluminum price is $20 to $40 a tonne higher because of the backlog at the Detroit warehouses. The physical price is currently around $2,800 per tonne.
That premium is forcing U.S. businesses to fork out millions of dollars more for the 6 million tonnes of aluminum they use annually.
It has also had a knock-on impact on the global market, which is forecast to consume about 45 million tonnes of the lightweight, durable metal this year.
Also pushing aluminum costs higher are bank financing deals, which are estimated to have locked up about 70 percent of the 4.4 million tonnes of the metal sitting in LME-registered warehouses around the world. LME inventories hit an all-time record above 4.7 million tonnes in May.
In a typical deal, a bank buys aluminum from a producer, agrees to sell it at some future point at a profit, and strikes a warehouse deal to store it cheaply for an extended time period.
The combination of the financing deals and the metal trapped in Detroit depots, means only a fraction of the inventories are available to the market.
Premiums for physical aluminum -- the amount paid above the LME's cash contract currently trading at $2,620 a tonne -- in the U.S. Midwest hit a record high of $210 a tonne in May, up about 50 percent from late last year. In Europe, the premium is at records above $200 a tonne, double the levels seen in January 2010.
The ripple effect into Asia has seen the premium paid in Japan increase 6 percent to $120 a tonne in the third quarter from the previous quarter, the first rise in nearly six quarters.
COLLECTING THE RENT
You won't hear banks like Goldman complaining. Rental income continues to pour in at the 19 Detroit area warehouses run by Metro as of June.
From the outside one recent afternoon, a depot in the Detroit suburb of Mt Clemens appeared to be deserted. But neighbors say the place is a whirl of activity in the early hours of the morning when metal is usually delivered for storage.
The LME sets the maximum allowable rent at 41 U.S. cents per day per tonne. At that rate, Goldman's warehouse operation in Detroit -- said to be holding more than 1.1 million tonnes -- could be generating as much as $451,000 per day or about $165 million a year in revenue.
An exact figure cannot be calculated because many clients negotiate lower rental rates and Goldman declined to detail its income from its warehouse business. But when Swiss-based trading company Glencore listed earlier this year it revealed that its metals warehousing unit generated $31 million in profit on $220 million in gross revenue in 2010.
Continue reading at Reuters...
Jul 28, 2011 at 1:45 PM
Reader Comments (6)
http://www.huffingtonpost.com/2011/07/28/exxon-profits-up-41-percent-prices-expectations_n_911793.html
http://www.huffingtonpost.com/2011/07/27/for-profit-college-financial-aid_n_911311.html
JPMorgan's Jamie Dimon, Goldman Sachs' Lloyd Blankfein and Bank of America's Brian Moynihan, among others, said in a letter that an agreement needs to be reached this week.
http://www.huffingtonpost.com/2011/07/28/debt-deal-warning-banks_n_911922.html
Whiny dipshits.