“London Metal Exchange Wins Court Appeal in Aluminum Dispute” – Wall Street Journal, 8 October 2014

The London Metal Exchange (LME) has been in court with Russia-based aluminum manufacturer United Co. Rusal PLC since December, due to Rusal’s opposition over a new set of rules LME is introducing that will alleviate bottlenecks at metals warehouses. A lower court ruled in favor of Rusal in May; the suit was then brought to the UK Court of Appeal, which ruled in favor of the LME. The LME is now set to enact its new rules on February 1, 2015.

Recently, metals warehouses — such as those owned by JPMorgan and Goldman Sachs in the US — have been under heavy fire because of backlogged inventory. Many claimed that by creating bottlenecks and backlogging inventory, warehouses were making a profit from extending the rent that manufacturers and metal owners pay to store metal. In 2013, a case was brought against the Wall Street banks, accusing them of purposely creating a traffic jam in the warehouses. The suit was dropped this past summer, though the warehouses will continue to be surveilled by regulatory commissions, such as the US Department of Justice and Commodity Futures Trading Commission.

Metal warehouses, like the ones that JPMorgan and Goldamn Sachs own, are part of an international network of LME warehouses. Sometimes aluminum orders were so backlogged that customers waited two years to be sent their aluminum. Others have had to spend additional money on premiums to obtain their orders faster.

Last summer, in an attempt to decrease backlogs, the LME proposed new guidelines that allowed warehouses that had bottlenecks of over 50 days to send out more aluminum than they accepted until the bottlenecks were minimized.

After the LME’s initial proposal, Rusal protested, claiming that the new guidelines would financially hurt the company. But now, since the Court of Appeal overturned the lower court’s decision, bottlenecked LME warehouses are already increasing their number of shipments. The Court of Appeal fined Rusal and has banned the company from appealing; however, Rusal still plans to file an appeal with the UK’s Supreme Court.

The original intent of the LME was to provide a forum to balance global and regional  aluminum supply and demand, and inventory management. However, the LME has taken  new unwanted dimensions — accelerating volatility in the global aluminum market leading to more speculation as opposed to manufacturing actions.

Read more:
A Shuffle of Aluminum, but to Banks, Pure Gold
Aluminum Probe Focuses on Costs to Users
Wall Street Banks Get Rid of Aluminum Price Fixing Suits

Developed and Written by Dr. Subodh Das and Tara Mahadevan

October 8, 2014

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Copyright 2014. All rights Reserved by Phinix, LLC.

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“Wall Street Banks Get Rid of Aluminum Price Fixing Suits” – Nasdaq, 2 September 2014

In 2013, a case was brought against Goldman Sachs, JPMorgan, Glencore PLC, the London Metal Exchange (LME), et al, accusing the banks and LME of creating bottlenecks in their aluminum warehouses in May 2009, causing metal prices to skyrocket for the accused’s gain.

More waiting time in the warehouses meant that the banks could raise the cost of the lease payments, which established a dearth in aluminum availability and forcing aluminum prices to inflate. Major industries, like the beverage can industry and the automobile industry, were impacted.

However, the presiding judge dismissed the antitrust lawsuit. The judge cited that the complaints didn’t show that the defendants were working together to increase prices. The judge’s verdict disallows the plaintiffs who are commercial end-users and consumer end-users to re-appeal their cases; ‘first-level’ aluminum purchasers, on the other hand, are permitted to re-appeal. Since LME is viewed as part of the UK government, it was exempt from the suit due to the Foreign Sovereign Immunities Act.

The Wall Street banks’ metal businesses will continue to be surveilled by regulatory commissions such as the US Department of Justice and Commodity Futures Trading Commission.

Developed and Written by Dr. Subodh Das and Tara Mahadevan

September 5, 2014

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Copyright 2014. All rights Reserved by Phinix, LLC.

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“Aluminum Probe Focuses on Costs to Users” – Wall Street Journal, 13 August 2013

We previously reported on Goldman Sachs and JPMorgan Chase’s expensive aluminum storing and delivery practices, which, in August, were called into question by the Commodity Futures Trading Commission (CFTC), an independent agency of the federal government that regulates futures and option markets.

The CFTC believes that some Wall Street Banks have falsely inflated the prices of aluminum and other metals stored in their facilities, in order to make a buck (or well over a buck) from end users and consumers. The CFTC sent subpoenas to firms like JPMorgan and Goldman — as well as Goldman’s aluminum and metal storing facility Metro International Trade Services — requiring them to present recordings of their commodities operations from January 2010 and onward.

The firms developed a habit of shuffling their stores of aluminum, and holding on to them longer, in order to inflate prices; the additional time increased storage costs that are included in the aluminum price when delivered. The London Metal Exchange, which is in charge of creating pricing regulations, approved some of the firms’ warehouses that were subpoenaed.

Wall Street’s association with commodity and energy markets is being closely examined. Before the 1980′s, banking institutions weren’t allowed to own non-financial businesses — Congress wanted to reduce the risks banks take, as well as safeguard depositors. However, after the 1990′s, Congress and the Federal Reserve allowed some banks to develop businesses in storing and transporting commodities.

Both JPMorgan and Goldman have denied the allegations, maintaining that customers don’t face a wait time, and would receive shipments immediately. They also noted that delayed deliveries were due to client orders and not the firms themselves.

Time to move buying, selling and pricing back to inventory decisions, basing the metal market upon true market supply and demand from actual producers and consumers, rather than speculators and investment bankers.

Developed and Written by Dr. Subodh Das and Tara Mahadevan

September 25, 2013

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“A Shuffle of Aluminum, but to Banks, Pure Gold” – New York Times, 20 July 2013

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

Phinix LLC

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