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March 2, 2010

Goldman Sachs and J.P. Morgan Pay Handsomely To Control Physical Base Metal Stockpiles

As piles of base metals from aluminium to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing. The deals reflect banks’ appetite for exposure to physical commodities beyond traditional commodities derivatives. …

Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.

(source: “Goldman and JPMorgan enter metal warehousing,” Javier Blas, Financial Times, March 2 2010.)

Here are a few questions everybody should ask:

  • Are the profit margins so good in metals warehousing that they exceed the profits on the banks’ other businesses?
  • If not, why would these banks being paying handsomely to be in this business?  Could it have something to do with the ability to influence prices by controlling the physical supply of these commodities?
  • Why has the Federal Reserve given these banks sweetheart exemptions from the Federal Reserve rules which prevent banks from being in the physical commodity business?
  • Should banks be encouraged to spend billions of dollars to gain control over world metals markets instead of being encouraged to perhaps make loans within the United States to help revive the shattered U.S. economy?
  • Does anyone besides me get a sinking feeling learning that these two banks will control half of the inventories at the LME?

Dear all,

Has nothing been learnt from the financial crash and the commodities boom and bust of 2008?  Not if the latest news in the Financial Times is anything to go by.  Read it here.

It reports that, ‘Stockpiles at London Metal Exchange’s registered depots surge to an all-time high of 6m tonnes – up from 1m in 2007’ as ‘piles of base metals from aluminium to nickel build up due to poor demand’.  But over the last 12 months the LME’s US dollar price for primary aluminium has gone up by more than 50 per cent, copper roughly doubled and nickel more than doubled.  That is crazy when demand is low and stocks are record-high.

The only explanation lies in continued speculative purchases by index funds, hedge funds and banks’ proprietary trading desks.  The latter trade both on their own accounts and on behalf of exchange-traded funds that they run.  Under the corrupt process known as ‘internalisation’, their clients’ accounts and the banks’ own accounts get inextricably mixed up.

Now this FT report says two of the most powerful banks (Goldman Sachs and J.P. Morgan Chase) have taken control of metals warehousing directly.  Why on earth should this be allowed?  Their business is banking – taking deposits and lending money – not trading and speculation, and still less warehousing and logistics.

Over the last 18 months there have been signs of physical oil prices being manipulated by firms which bought up whole cargoes and left them in tankers sitting at the docks.  OPEC has complained that that led to artificially high prices when demand was low.  Much the same evidently applies to the metal markets.

The LME is in London, and it is up to the British government to ensure that it is properly run, and that banks do not get involved in things which should literally be none of their business.  Banking licences give them big privileges.  In return, they should be required to stick to banking, and banking alone.

Best wishes,

Tom Lines

Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.

Goldman Sachs last week bought US-based Metro International in a deal that rival bankers and warehouse executives valued at about $550m. The bank declined to comment on the amount but said: “The company will continue to operate independently, keeping its name and headquarters in Detroit and [it] will be run by the existing management team.”

Last month JPMorgan acquired UK-based Henry Bath as part of a deal to buy a large chunk of the RBS Sempra Commodities business for $1.7bn.

Swiss-based oil and metals trader Trafigura this week said it had bought UK-based warehouse company NEMS Ltd for an undisclosed sum. Pierre Lorinet, Trafigura chief financial officer, said the acquisition reflected the trader’s “commitment to ongoing investment in logistics and warehousing within the metals” sector. “NEMS will continue as an independent operation,” he added.

The deals will leave Rotterdam-based C. Steinweg and Pacorini, based in Trieste in Italy, as the only two big independent warehouses. In addition, Singapore-based CWT Commodities is a medium-size operator in the sector, with a strong network in Asia.

Industry executives and bankers say Goldman Sachs and JPMorgan paid handsomely for their warehouses. “They are buying at the top of the market,” one executive said, referring to the current mountain of metal being stockpiled.

In September, Glencore bought Pacorini, leaving C. Steinweg as the only large independent metal warehouse.

Steinweg not planning  to sell:

See also:

Hunt Brothers


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