Goldman Sachs Offers Aluminum to Clients Stuck in QueueMichael J. Moore and Agnieszka Troszkiewicz
Goldman Sachs Group Inc. offered to speed up delivery of aluminum to users of the metal and proposed changes to industry rules amid claims that its warehouse unit created shortages and drove up prices.
So far no client has accepted the bank’s offer to swap their metal stuck in queues for immediately available aluminum, Goldman Sachs President Gary D. Cohn, 52, said today in a CNBC interview. Consumers should have priority over other clients in getting aluminum out of warehouses and the London Metal Exchange system needs more transparency, Goldman Sachs said in a statement.
“We feel horrible for consumers if they can’t get metal,” Cohn said. “We don’t believe that to be the fact.”
The beverage industry has complained that banks and other warehouse owners are manipulating aluminum supplies and slowing deliveries to drive up the price. Goldman Sachs said that while longer queues in recent years have been a factor in the premium of physical metal over the spot price, the waits are not driving up the price of aluminum, which has fallen since 2006.
“It’s a recognition of a longstanding problem in the market that needs to be solved,” said Diego Valiante, head of capital markets at the Center for European Policy Studies in Brussels. “Clearly there is also the understanding of the urgency in solving this issue.”
Detroit, New Orleans, the Dutch port of Vlissingen, the Belgian city of Antwerp and Malaysia’s Johor have the longest waits for metal, according to Barclays Plc. Detroit is dominated by Goldman Sachs’s Metro International Trade Services LLC, while Glencore Xstrata Plc’s Pacorini Metals has the most storage units in Vlissingen, New Orleans and Johor. In Antwerp, it is NEMS, a unit of Trafigura Beheer BV.
Aluminum for delivery in three months fell 13 percent this year on the LME as stockpiles in warehouses monitored by the exchange neared a record. The premiums added to the LME price surged to a record 12 cents to 13 cents a pound in June, almost double the 6.5 cents in the summer of 2010, according to data from Austin, Texas-based researcher Harbor Intelligence. The surcharge fell for the first time this year in the week ending July 19, according to Harbor.
Glencore, the largest owner of LME warehouses, declined to comment through a spokesman. Trafigura continues to offer prompt delivery of metal to its customers, an official at the Singapore-based commodities trader said. Henry Bath warehouses, owned by JPMorgan Chase & Co., don’t currently have queues, according to a person familiar with the business who wasn’t authorized to comment and requested anonymity.
Goldman Sachs’s offer is “great news and any pricing manifestations due to warehousing issues will hopefully resolve going forward,” said Bart Chilton, a member of the Commodity Futures Trading Commission. “This entire matter continues to raise the larger issue of banks owning physical commodities, warehousing and delivery mechanisms.”
Costs were inflated by $3 billion worldwide in the past year because of the backup in aluminum supplies, Tim Weiner, a global risk manager at brewer MillerCoors LLC, told a U.S. Senate panel last week.
Goldman Sachs has secured metal directly from producers to be able to swap with end-user clients, Cohn said. The firm has made the offer at the LME spot price with no premium, according to a person briefed on the talks who asked not to be named because the offers were private.
“We are consulting with the metals trade and industry on a proposal to amend the delivery out obligations of warehouse companies with long queues, and we encourage market users to contact us with their views,” Miriam Heywood, a spokeswoman for the LME, said in an e-mailed statement.
In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operated 34 out of 39 storage facilities licensed by the LME in the Detroit area, according to exchange data. Goldman Sachs said in today’s statement that it isn’t involved with the daily management of the company.
Goldman Sachs earlier this year considered selling Metro, according to a person briefed on the discussions. The bank must sell the company within 10 years of its purchase, it said today.
JPMorgan said last week that it plans to get out of the business of owning and trading physical commodities ranging from metals to oil, days after a Senate panel questioned whether banks are abusing their ownership of raw materials to manipulate markets.
Cohn said that while his firm will sell Metro at the “appropriate time,” it doesn’t have plans to exit other commodity businesses.
“Commodity hedging is a core competency and one of the most important things we do in the firm, and our clients really need us to be in that business,” Cohn said. “We are staying in the commodity-hedging business.”
Low interest rates have encouraged some investors to buy and store aluminum with the intent of selling it at a later date, Goldman Sachs said in its statement. Warehousing companies, which don’t own the metal they hold, offered incentives to attract supply, according to research from Societe Generale SA.
Many market participants have sought to move metal to non-LME warehouses, where storage rates are lower, prompting the longer queues, Goldman Sachs said.