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 will weakened, 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 exchange, 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.
While only around a tenth of a cent of aluminum can’s cost can be drawn to Goldman’s methods, that tiny amount has commanded a price of over $5 billion in the last three years. And Goldman Sachs isn’t the only company to exploit federal regulations — JPMorgan Chase and Morgan Stanley have also invested in oil, coffee, cotton and wheat markets, requiring consumers to pay more.
Before 2010, when Metro International wasn’t Goldman-owned, customers only had to endure six week waiting periods for their metal bars to be found, fetched by a forklift and delivered. But with Goldman, the wait has increased tenfold, to as long as 16 months. Metro blames the delays on truck and forklift driver shortages, and administrative difficulties.
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.
Last year, it switched hands from Goldman, Barclays and Citigroup, now currently owned by a group of Hong Kong investors who have introduced new regulations that would reduce the bottlenecks at Metro. Still, LME has a large stake in what Metro charges: LME is given 1% of the rent amassed by all its warehouses, including Metro.
However, the Federal Reserve could revert its current position on exemptions, and disallow Goldman, JPMorgan and Morgan Stanley from invested in non-financial businesses. Speaking of pennies, these same banks are expanding their interests from aluminum to copper: last year, the SEC agreed to let JPMorgan, Goldman and BlackRock buy 80% of the copper accessible on the market.
As delays become longer and longer, manufacturers are beginning to purchase aluminum from mining or refining companies, instead of warehouses. Still manufacturers pay the price, as Metro’s delays increase manufacturers’ costs.
Developed and Written by Dr. Subodh Das and Tara Mahadevan
August 6, 2013
Copyright 2013. All rights Reserved by Phinix, LLC.