Another Blow to Metal Warehousing - Analyst Blog

Wall Street Biggies – The Goldman Sachs Group, Inc. GS and JPMorgan Chase & Co. JPM, Switzerland-based Glencore plc along with The London Metal Exchange (LME) – a subsidiary of Hong Kong Exchanges and Clearing Limited were sued by Duncan Galvanizing Corp. on Friday. The company accused these firms for hoarding zinc and the artificial rise in the metal's price.

The lawsuit, which seeks class action status, has been filed in the U.S. District Court in the Southern District of New York (Manhattan). The plaintiffs imputed the above-mentioned companies for indulging in anti-competitive and monopolistic actions in the warehousing business.  

Duncan alleged that in 2010, Goldman, JPMorgan and Glencore each purchased one of the largest metals warehouse operators to get control over the London Metals Exchange. Notably, 90% of zinc futures are traded on the LME. The suit accused these companies for conspiring to hoard zinc at warehouses in order to take advantage of inflating prices. Further, the lawsuit alleged that warehouse owners artificially increased waiting time to facilitate lease payment and raise metal prices.

Hong Kong Exchanges and Clearing will be fighting the case, while the spokesperson for Goldman stated that they would challenge the lawsuit. However, spokespersons of both JPMorgan and Glencore refrained from comments.

Last year, Goldman, JPMorgan, Glencore along with the LME faced a lawsuit for hoarding of aluminum and the artificial rise in the metal's price. Another lawsuit with similar charges was filed against Goldman and LME in the U.S. District Court for the Eastern District of Michigan by MI-based aluminum extrusion company, Superior Extrusion Inc in Aug 2013. The suit accused Goldman and LME of hoarding approximately 1.5 million tons of aluminum at warehouses in Detroit in order to take advantage of the inflating prices.

The lawsuit comes in the wake of criticism of banks that own commodity assets and trade raw materials. Notably, in Jul 2013, the Federal Reserve stated that it was reviewing its 2003 decision of allowing banks to pursue trading in the physical commodity market.

Further, following complaints of banks and traders manipulating supplies and prices, the Commodities Futures and Trading Commission has initiated an inquiry into the role of banks in the metals warehousing operation.

In the wake of heightened regulatory and political scrutiny of banks' ownership in physical commodity business, JPMorgan announced its plan to exit such operations last year. Last week, Goldman also initiated the sale process of its metals warehouse unit – Metro International Trade Services LLC.

Among others, Barclays PLC BCS, Deutsche Bank AG DB, Bank of America Corp. BAC and Morgan Stanley MS are some banks that are streamlining the metal business owing to increased regulatory scrutiny and mass criticism.

Lawmakers are concerned about the risks from banks' ownership of warehouses and plants. They believe that banks' holdings of these assets tend to concentrate market power and increase bank profits, consequently adversely affecting consumers. Therefore, regulators across the globe are investigating banks' role in the commodity trading business more closely.

Goldman currently carries a Zacks Rank #3 (Hold), while JPMorgan carries a Zacks Rank #5 (Strong Sell).