***LORD COPPER: Warehouses laugh all the way to the banks
The business of warehousing metals is a fascinating one. And yes, I do realise that statement makes me sound like someone who stands on train platforms in an anorak, holding a notebook and a thermos flask.
But some of the world’s major banks seem to have been thinking about it too. The news that MB broke yesterday about Goldman Sachs buying Metro followed shortly on the heels of JP Morgan Chase’s purchase of RBS Sempra assets, including the warehousing business Henry Bath.
You can rent the most run-down sheds in a port area, which will cost you peanuts, and people will pay you good money to hold their metal there.
Then, when they want to take it back again, you can charge them more to move it out and put it in a ship or on a truck.
Of course, it’s a bit more complicated than that. The successful warehouses install sophisticated stock management systems, security has to be sound and the condition of the metal has to be protected.
But still, the underlying truth is that you can use cheap land to fill with metal, for which you will be paid a daily rental. And if you manage to pick a location which is awkward or expensive to ship metal away from, then it just stays and stays and stays, earning that daily rental.
When the then Metallgesellschaft bought fellow ring-dealer Henry Bath, the warehousing side of the latter was virtually a side-issue to the overall deal, and it was only as the economic situation changed and the warehouse filled up that they fully appreciated the cash-generating machine they had acquired.
And through the rise of MG, the turbulence of Enron to the transformation into RBS Sempra, that machine’s engine has kept on purring.
Now, it’s to be owned by American bank JP Morgan Chase.
This seems to be changing the game a bit.
Two of the world’s foremost banks buying into companies that store metal? It would have been unthinkable a few years ago.
And yet, it is telling us something about the world, and the banks’ eagerness to diversify. It’s long been clear that in the current economic cycle, the real money to be made in the oil business is in storage, and exploiting the contango.
In other words, chartering vessels, relatively cheaply, filling them with spot oil, selling the futures against it and rolling the position as long as the contango lasts.
It’s a simple trade, but its generated huge profits for those involved, who, if we are to believe market gossip, include some of the large investment banks.
Strangely enough, it’s also one of the reasons for apparent oil shortages, when in reality the oil is there, but just locked away in financing deals.
The same trade is widely used in the metal market.
Economic activity has slowed down, consumers have no desperate desire to begin restocking, so excess metal has to find a home somewhere.
So is it an unreasonable step to suggest that the banks, who have seen physical traders, financed by them, making substantial profits from the metal finance/carry trade, deciding to get directly into that action themselves?
There is another significant factor, though. There is no doubt that the banks are cautious of Obama’s intentions regarding the curtailment in one way or another of derivatives trading.
But if they are involved in what the world at large perceives to be “real” trading, instead of “paper” trading, then surely they have a much stronger case to continue those activities.
And what could be more “real” than financing and storing physical metals? There are strong suggestions that other banks with commodity derivative trading groups are looking hard at the prospect of adding physical trading to the mix – Standard Bank recently took on physical metal traders – but so far, these two big boys seem to have stolen a march.
Strengthening the hand of the warehouse players does, to me at any rate, suggest that we will probably see metal being pulled even more aggressively into those warehouses.
If you’ve been reading my columns over the last month or two, you’ll know that in my view, the LME and its warehouses are the best place to sell registered metal.
Backed by two of the world’s strongest banks – with potentially more to come? Could you really beat that?