When the London Metal Exchange was founded in the days of steamships, contracts were priced three months out to reflect the time it took to get tin from Southeast Asia or copper from Chile. These days, it can take twice as long to get aluminum out of an LME-approved warehouse in Detroit.
The waiting lines are spurring complaints from consumers about a business that’s now part of Wall Street, with storage owned by Goldman Sachs Group Inc. and JPMorgan Chase & Co. While global aluminum inventories reached a record in May, buyers in the U.S. Midwest were paying the biggest premium in more than a decade for immediate supply. The LME’s board meets tomorrow to review rules on delivery rates from the largest stockpiles.
“The supply-chain risks are not what should be happening in North America when there is adequate metal floating around,” said Nick Madden, chief procurement officer at Atlanta-based Novelis Inc., which turns aluminum into products for Coca-Cola Co. and Ford Motor Co.
The LME, founded in 1877, is reviewing its rules to adapt to a business that expanded more than fourfold after a decade-long bull market in commodities. The bourse handled $11.6 trillion of contracts last year, compared with $2.5 trillion in 1999, while inventory of the exchange’s six main metals in warehouses jumped to 6.2 million tons from 2.1 million tons, according to data compiled by Bloomberg.
Withdrawing aluminum from Detroit warehouses can take as long as seven months, Harbor Intelligence, a Laredo, Texas-based researcher, estimated this month. The Midwest premium paid on the LME’s cash contract reached 9.5 cents a pound ($210 a metric ton) in May, compared with an average of about 5.2 cents in the previous decade, according to data from Metal Bulletin.
The increases “definitely impact our prices” and higher costs are passed on to customers, said Matt Lanzer, director of finance at Prince George, Virginia-based Service Center Metals, whose customers include Reliance Steel & Aluminum Co. and Ryerson Holding Corp.
The LME, which collects 1.1 percent of the daily rental fees for metal stored, has approved more than 600 warehouses and compounds worldwide, at least 24 of which are in Detroit, according to the exchange’s tally of listed facilities. The depots are selected based on such criteria as access to highways and their ability to meet minimum daily deliveries to clients, known as the load-out rate. Stockpile data is collated daily and used by traders to gauge changes in demand.
Demand for metals dropped in 2008 and 2009 as the global economy endured its worst recession since World War II. Combined inventories rose from 1.32 million tons at the end of 2007 to 5.95 million tons two years later, data compiled by Bloomberg show. Almost 3.7 million tons of that expansion came from aluminum. Today, LME-monitored stockpiles of the metal stood at 4.42 million tons, 25 percent of it in Detroit.
The LME’s three-month aluminum contract advanced 25 percent in the past 12 months, and traded at $2,494.50 per ton at 9:35 a.m. in London. Prices fell as low as $1,279 in February 2009.
The bourse got 18 complaints about warehousing from March 2009 to August 2010, eight of them relating to the U.S., according to a report from Europe Economics, a London-based research company commissioned by the LME to study the issue. Novelis, which buys about 3 million tons of aluminum annually, including from scrap, complained in May this year, Madden said.
Current rules oblige warehouses to deliver metal on a sliding scale up to 1,500 tons a day depending on the capacity that a company has at any given location, LME Chief Executive Officer Martin Abbott said in a note to members on May 27.
The minimum load-out rate may be raised to 3,000 tons per day for a company with more than 900,000 tons in a single location, according to Abbott’s statement. The LME also said it was recommending that the rules be linked to the amount of metal in storage rather than capacity.
The LME’s board approved on June 16 a proposal to raise the minimum load-out rates for stockpiles of 300,000 to 900,000 tons from April 2012. Rules for inventories of less than 300,000 tons are unchanged and the board didn’t take a decision on those exceeding 900,000 tons.
“We have no interest in ensuring that metal is locked up in warehouses,” said Chris Evans, business development head at the LME. Consumers have complained as they “feel that metal should be available to them at lower prices, but the market doesn’t work like that,” he said.
Higher load-out rates for aluminum stockpiles may cut operators’ income by as much as 50 percent and also lower U.S. premiums, Daniel Brebner and Xiao Fu, analysts at Deutsche Bank AG in London, wrote in a report June 2.
Detroit is the only single location with stockpiles above 900,000 tons. At least 19 of LME-approved warehouses in the city belong to Metro International Trade Services LLC, which charges 41 cents a day to store a ton of aluminum, according to data on the LME’s website. The company was acquired by New York-based Goldman Sachs last year.
“We have an open mind with regard to making adjustments that will benefit the marketplace without having unintended consequences,” said Andrea Raphael, a spokeswoman for Goldman in New York. “We follow LME requirements in terms of storing and releasing metals.”
The average daily withdrawal from Detroit’s warehouses in the past 12 months was 1,526 tons, according to data compiled by Bloomberg from LME figures. At that pace it would take more than two years to withdraw all the current stockpiles. Novelis’s Madden said that the load-out rate for Detroit should be raised to 9,000 tons, with the change introduced immediately.
Three of the four largest warehouse operators were bought by Goldman, JPMorgan and Baar, Switzerland-based Glencore International Plc in 2010.
Metro International added at least 17 warehouses since it was bought by Goldman in February 2010, according to LME data. JPMorgan took control of Henry Bath & Son Ltd. in July 2010 as part its $1.7 billion acquisition of units of RBS Sempra Commodities.
Glencore, the largest listed commodity trader, said it agreed to buy Pacorini Metals in August 2010 and Hong Kong-based Noble Group Ltd. acquired Delivery Network International LLC the following month. Trafigura Beheer BV, based in Amsterdam, said it bought North European Marine Services Ltd. in March 2010.
Brian Marchiony, a spokesman for JPMorgan, and Simon Buerk, a spokesman for Glencore, declined to comment. Brad Smolar, a spokesman for Noble, didn’t return an e-mail and two calls seeking comment. Neil Cameron, a spokesman for Trafigura, said that company wasn’t immediately able to comment.
Waiting times at warehouses may not be the only reason premiums are rising. As much as 70 percent of aluminum inventory may be tied up in financing deals that mean it’s unavailable to consumers, Societe Generale SA estimates.
“The system is under pressure as a result of some extraordinary factors,” LME CEO Abbott said in the May 27 notice to members. “It should be noted that this issue currently is specific to aluminum and to one location; the LME does not have a systemic issue with its warehouse network.”
A “significant portion” of stockpiled aluminum is tied to financing, according to Gordon Hamilton, vice president of metal management, sales and marketing at the Montreal-based Alcan unit of Rio Tinto Group, the world’s second-largest producer. The higher premiums are reflecting those deals, as well as higher transport costs and lower imports, he said.
Warehousing issues also pre-date the acquisitions by Goldman, JPMorgan, Glencore, Noble and Trafigura. The LME got 30 complaints from consumers about warehouses in the first half of 2001, including grievances about the speed of deliveries, according to a report on the subsequent investigation in 2002.
General Motors Co., based in Detroit, is “watching it closely as we are a significant user of aluminum,” Kelly Cusinato, a spokeswoman for the carmaker, said in an e-mail.
While the jump in aluminum prices hasn’t hurt Boeing Co.’s profit, it is “a watch item,” said John Byrne, head of materials and structures at the commercial-airplanes unit of the Chicago-based company. Rising premiums at a time of near-record stockpiles “doesn’t make sense,” he said.