Across the world, millions of tons of metals — aluminum, copper, nickel and zinc — are being kept in secretive “shadow warehouses”, facilities that have gone unchecked and that don’t reveal their assets to the public. These warehouses function separately from the London Metal Exchange (LME), the long-established system for housing such metals.
Anywhere from 7-10 million tons of aluminum are being kept in shadow warehouses, both in the states and abroad, in places like Malaysia and the Netherlands; while a scant 5.5 million tons of aluminum are currently stored in LME warehouses.
Because producers and consumers don’t know how much metal actually exists on the market, it has become more and more challenging for experts to determine market pricing. If large quantities of metals surface onto the market from shadow warehouses, then it can become more costly to create everyday goods; conversely, mine and smelter production could be curbed if pricing falls beneath production expenses.
Shadow warehouses can be more profitable for companies involved in the metals markets: the unregulated facilities cost 10 times less than LME warehouses, while also providing companies with information that the general public doesn’t know. Yet, companies involved in the shadow warehouse system may have to pay higher bank interest rates, since LME warehouses are thought to be more stable.
In November, LME set new guidelines that obligate LME warehouses to ship out more metal than they receive, for deliveries with 50+ day wait times. Many LME warehouses have been experiencing massive bottlenecks, which the new rules address. The rules will begin on April 1.
Shadow warehouses exhibit the dark side of capitalism, where metals are stored and hoarded for profit making, and where market supply and demand dynamics are being artificially controlled.
Developed and Written by Dr. Subodh Das and Tara Mahadevan
December 29, 2013
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