HOTTER ON METALS: Superior Extrusion case puts physical market on trial

The debate over London Metal Exchange warehousing has had class-action lawsuit written all over it for some time.

The debate over London Metal Exchange warehousing has had class-action lawsuit written all over it for some time.

As long ago as June 2011, US law firm Hagens Berman launched an investigation into claims that JP Morgan, Glencore and Goldman Sachs were artificially inflating metal prices through their ownership of LME warehouses.

Little has been heard of that investigation subsequently.

But Michigan-based consumer Superior Extrusion Inc has this month filed a class-action lawsuit to the district court in the same state, alleging anti-competitive behaviour in warehousing by the LME and Goldman Sachs in connection with aluminium.

Both Goldman Sachs and the LME said they will defend themselves vigorously against the allegations.

Goldman Sachs is named because the company owns warehousing firm Metro International Trade Services. Queues to get metal out of Metro’s Detroit warehouses sometimes reach 18 months.

That fact has pushed up US Midwest premiums in particular, Supreme Extrusion alleges, and it is for this reason – and not for having metal stuck in a warehouse queue – that Superior Extrusion has filed its suit.

The extrusion firm had been buying metal in Michigan, Ohio, Wisconsin, Indiana, Illinois, Minnesota and other parts of the USA “at the inflated prices, including the Midwest Premium or Platts MW premium prices,” it said in the filing.

It also names the LME for allegedly accommodating the interests of Goldman Sachs – until the end of last year the second biggest shareholder in the exchange after JP Morgan.

In other words, turning a blind eye to the complaints of other consumers, including large US companies such as Coca Cola, General Motors and MillerCoors, and allowing Goldman Sachs to inflate aluminium prices with the “knowledge, consent and agreement (and to the profit) of the LME,” the lawsuit alleges.

“Profit” due to the rental income the exchange receives from warehouses that have LME warrants in their storage; “knowledge, consent and agreement” because the exchange sets the warehouse rules, Superior Extrusion alleges.

Is anyone else involved?
As if that wasn’t enough, the lawsuit also named what it called “Joe Doe defendants one to ten,” which are other, as yet unnamed persons who own warehouses, have similar financial interests as Goldman Sachs, and have otherwise entered into what Superior Extrusion alleges to be the same mutually beneficial agreement as that which it alleges exist between Goldman Sachs and the LME.

In other words, Superior Extrusion is saying there are potentially other LME-approved warehouse firms that have acted in the same way it alleges Goldman to have acted – paying incentives to get metal into storage, deliberately slowing up deliveries in order to benefit from higher rent, and seeing premiums for physical delivery skyrocket as a result.

It is certainly the case that there are queues for material at warehouses that are not owned by Goldman Sachs and that other warehouse firms have paid incentives to bring material into their sheds – which is not illegal – though whether Superior Extrusion has specific companies in mind for “Joe Does one to ten” remains to be seen.

Superior Extrusion also said in its filing that it “believes that there are hundreds” of other market participants in the same position as itself, and that it had filed a class action to make it less burdensome on the courts, to save substantial economies of time, effort, and expense, and to assure uniformity of the court’s decision.

It has also asked for trial by jury.

Who’s on trial?
This lawsuit isn’t just proposing to put Goldman Sachs, Metro and the LME in the dock.

It also threatens to try the entire LME physical market, along with the warehousing system and any traders, merchants, bankers and producers that have at any point asked a customer to pay a high premium for metal, or paid an incentive to put it into storage.

MillerCoors estimated at a recent US Senate hearing that the queues in Detroit and consequent premiums would cost consumers an extra $3 billion this year.

Aluminium consumers have for some time talked of putting together a large class-action lawsuit.

Whether or not they now join Superior Extrusion’s case will speak volumes about their view of whether its merits warrant a court fight or mediation with Goldman Sachs and the LME.

Andrea Hotter
Twitter: @andreahotter