The debate about aluminium premiums and the LME warehousing system has escalated in recent weeks with interventions by US politicians, Goldman Sachs and most recently a class action lawsuit in the USA against the bank and the exchange itself on allegations of anti-competitive behaviour – which makes it even more important to get the basic facts right.
The basic facts about pricing, premiums and availability
In February 2010, when Goldman Sachs took over warehousing firm Metro International, the average cash price of aluminium on the LME was $2,049 per tonne and the US midwest aluminium premium was about $130, equating to a cost for consumers of $2,179 per tonne, according to Metal Bulletin’s Price Book.
In July 2013, the average cash price of aluminium was $1,767 per tonne, while the US midwest aluminium premium had risen to $260 per tonne, equating to a total cost of $2,027 per tonne.
The overall cost of aluminium has fallen by 7% over that period, in other words, even taking into account the far higher premiums enabled by the queues.
Nor is it the case that the large stocks at Metro’s Detroit warehouses began with its takeover by Goldman Sachs, as the New York Times article said.
“After Goldman bought the company in 2010, Metro International began to attract a stockpile,” it wrote.
In fact, as Metal Bulletin, which broke the story about the takeover in the first place, reported back in February 2010 the Metro warehouses were already full of material at that time.
And the reason that the warehouses in Detroit were full was simple.
In the wake of the financial crisis and the breakdown in demand that ensued, North American aluminium producers used the London Metal Exchange as a market of last resort.
They delivered against short positions on the exchange, and they did so in Detroit, whose transport links made it the obvious destination for those large producers to access the market.
(As the LME made clear, there is a possibility that delivery against short positions might be impeded in the future as a result of linking load-out rates to deliveries in.)
In other words,the numbers do provide invaluable background to what is going on in warehousing and aluminium premiums.
The argument hots up
But instead of the discussion being grounded in such fundamentals, the argument has been prey to highly charged allegations.
The New York Times article in July looked at the long queues for aluminium in Metro’s warehouses and began by asserting that every time “thirsty Americans open a can… they pay a fraction of a penny more” because of what the paper characterised as “a shrewd maneuver by Goldman Sachs and other financial players”.
The US senate subcommittee about the actions of banks in commodity markets followed, and then there was even a feature on the Jon Stewart show — which is the most emailed YouTube link of all time (in the aluminium business at least).
“Aluminium users like MillerCoors are being forced to wait in some cases over 18 months to take physical delivery due to the LME warehouse practices or pay the high physical premium to get aluminium today,” MillerCoors risk manager Tim Weiner told the senate hearing.
Even an impartial observer of the US senate subcommittee hearing might have been left with the impression that aluminium consumers cannot get hold of prompt metal at any price.
Clearly, and as aluminium producers have been at pains to point out, that is not the case – though the premiums being charged by producers and traders do reflect the cost of storing cancelled warrant material in the queue.
Goldman Sachs hits back
On July 31, Goldman Sachs’ president and chief operating officer, Gary Cohn, a former commodities trader, came out fighting to counter the punches thrown at the company as a result of its ownership of London Metal Exchange-approved warehousing company Metro International.
He appeared on CNBC in an attempt to dismantle some of the claims that have arisen in the mish-mash of half-facts, misunderstandings and outrage about the higher costs that the aluminium queues are purportedly causing for US consumers.
“We feel horrible for consumers if they can’t get their metal,” Cohn said, before adding: “We don’t believe that to be the case.”
Cohn told CNBC: “We’ve gone to our consuming clients, and we’ve offered to take their in-queue warrant and deliver them physical metal as soon as they need it. So far we haven’t found a consumer that needs to do that transaction.”
Consumers remain worried
Consumers such as Novelis’s Nick Madden, who has been outspoken on the warehousing issue for years, have acknowledged the recent proposals by the LME to drive down the queues by linking load-out rates to deliveries in, but said the reforms will be implemented too slowly and are regrettably late.
One possible inference from Madden's statement was that Goldman's offer was a hollow one, since, in common with other consumers, Novelis has not used the LME as a market of last resort for purchases because of the queues.
The result of all this has been that Goldman Sachs’ arguments about the case appear to be backed by many market observers.
At the same time, they note that Goldman’s suggestions have acted more to reframe the debate, than to change the market for consumers.
The class action lawsuit, which both Goldman Sachs and the LME said they will vigourously defend themselves against, is another manifestation of the story's evolution.
Goldman Sachs is accustomed to facing the threat of court filings, the LME not so.
For Metal Bulletin’s archive of reports on the LME warehousing issue, click here.