Goldman Sachs and LME: Aluminum Storage – Monopolistic Behavior

Goldman Sachs and the London Metal Exchange have had a case brought against them both in a court in the US regarding anti-competitive behavior in aluminum storage, with a monopolistic effect thrown in for good measure.  The lawsuit was filed on August 1st in Detroit Federal Court and it is Superior Extrusion that is aiming to get class-action status (Superior Extrusion is acting on behalf of the whole field of aluminum production). Superior Extrusion is an aluminum and related product-provider located in Michigan and they are prosecuting Goldman Sachs and the London Metal Exchange for having made a series of agreements in a complex network of interconnectedness along with also having restrained the supply of aluminum on the market in order to control and inflate prices in violation of antitrust laws in the US.

Goldman Sachs

Goldman Sachs and the London Metal Exchange restricted the supply of 1.5 million tons of aluminum by simply stocking it in a warehouse in Detroit according to Superior Extrusion. The result was therefore delays in deliveries to customers that sometimes meant a lead-time of up to 16 months (again according to the lawsuit filed in Detroit Federal Court by Superior Extrusion). Goldman Sachs stated in an interview withBloomberg that it was “without merit” and that the investment bank would be contesting the accusations brought against them.

Aluminum buyers have been making regular complaints over the past months stating that owners of the warehouses of the London Metal Exchange have been restricting supply and increasing prices in a market that has been depressed for some time now. According to analysts aluminum costs have increased by $3 billion in one year due to warehouses slowing down on delivery dates. Artificially creating a restriction on the supply of aluminum meant that prices suddenly increased and remained higher than they should have been. Goldman Sachs owns 34 out of the 39storage areas that are licensed by the London Metal Exchange in Detroit. It gained control of those warehouses when it took over Metro International Trade Services LLC, which owned and operated the warehouses.

In an attempt to probably avoid the lawsuit action being filed against them, Goldman Sachs agreed to make changes to industry rules in the aluminum trade on July 31st last. No client accepted the offer of exchanging aluminum that was stuck in bottlenecks in the warehouse queues for immediately-deliverable metal. Gary D. Cohn, the Chief Executive Officer of Goldman Sachs stated in an interview with CNBC: “We feel horrible for consumers if they can’t get metal,” Cohn said. “We don’t believe that to be the fact.”

However, deny as they might, the facts are there. Goldman Sachs and the London Metal Exchange have transformed themselves into the new Oppenheimer–family controlling the diamond market through De Beers, restricting the supply of diamonds to the market and making them a rarity.

London Metal Exchange

According to Goldman Sachs, the price of aluminum has fallen since 2006(by 40%). But, research carried out by the Texas research analyst Harbor Intelligence, aluminum (delivery in 3 months) fell 13% in 2013 as stock reached all-time record levels in warehouses of the London Stock Exchange. As a result, premiums also increased to record levels: 12 or 13 cents a pound (June 2013). In 2010, those premiums stood at 6.5 cents per pound. Goldman Sachs took over the control of the LME-licensed warehouses in February 2010.

Detroit might have gone bankrupt and the storage facilities off Michigan Avenue certainly might be in a derelict neighborhood, but they are the prime site for the Goldman-Sachs money spinner. Restricting supply and causing delivery delays is as old as the hills and you don’t have to be a financial expert to know what the result is going to be. It just seems strange that the powers-that-be that allowed the banks to control the commodities markets like this never actually thought a bit ahead before doing so. You wouldn’t have needed a crystal ball to know that the game would be easy and the chase was almost non-existent. Goldman Sachs created deals with producers, agreeing to buy aluminum and store it cheaply until the prices rose over an extended period of time.

Goldman Sachs’ warehouses in the Detroit area are the largest in the US and they currently have about 100 million tons of the metal just sitting there, which means about 25% of all stock in the world. Just merely sitting in the warehouse the metal can bring in millions of dollars in rent to Goldman Sachs. Creating a supply pinch by attracting more metal and letting it only leave in drips and drabs and at a slower rate than it arrives, means that its inflating prices. Goldman Sachs wins on every side of the scheme. Not only are the companies that need aluminum having to pay more for it, but they are also having to wait longer to get it. Sometimes that wait can be more than a year, which seems incomprehensible since there is an abundance of aluminum in the world today due to increased production.

LME

But, surely the London Metal Exchange is also just as bad. They are responsible for overseeing the licensing of those warehouses. It’s the London Metal Exchange regulations that need to be modified drastically. They allow warehouses to release limited amounts of their stock each day at a much lower level than what they might be taking in to store in those warehouses. Goldman Sachs’ Detroit warehouses in one year (June 2012 to June 2013) took in 42% of all aluminum in the world and only let 26% come out.

On July 30th this year JP Morgan was fined $140 million by the Federal Energy Regulatory Commission in the US through price manipulation of energy prices by its subsidiary JP Morgan Ventures Energy Corp. This lawsuit against Goldman Sachs and the London Metal Exchange will once again open up the can of worms related to allowing banks to have created cartels in the commodities markets transforming them into monopolies that are lucrative businesses. Price manipulation and monopolistic behavior is only good for one party in the market place and it’s certainly not the customer or the end-user that reaps the benefits from that. Just like JP Morgan and its energy subsidiary, Goldman Sachs has now announced that it may consider selling off Metro International Trade Services LLC and leave the commodity storage market in aluminum. Although it did add that it would sell it at the “appropriate time” and had no further plans to do the same in other commodity markets.

Anti-competitive behavior in the market place is out there, but when will the authorities and powers-that-be actually decide to really address the problem? New regulations must be brought in to calm the banking-sector’s control of the commodities markets and start thinking about the consumer more than the financiers.