Are Glencore, JP Morgan and Goldman-Sachs Scamming the LME Warehouse System?

Coming off the Harbor Aluminum conference last week, we wondered why the controversy surrounding the LME warehousing system and specifically the delays companies have experienced obtaining their metal from the LME’s Detroit Metro warehouse, (owned by Goldman Sachs) received little discussion, despite some quite negative press that we reported on previously here and here. Although Goldman-Sachs is everybody’s favorite firm to hate, we caught up with Jorge Vazquez of Harbor Aluminum to try and gain a better understanding of the specific warehousing issues.

MM: We learned from the press that the LME has a 1500-ton minimum outbound requirement for releasing metal. Traditionally, why does the LME have such a rule?

JV: The requirement goes from 800 to 1,500 tons depending on the storage capacity of the warehousing company per location. It takes considerable logistics and thus planning to load out metal. It takes approximately 20 minutes to fill a truck with 20 tons of material. The minimum load is the result of perceptions as to the amount of metal that can be loaded out considering logistics and warehousing economics/profitability.

MM: Why do you think this issue has come to the foreground only now?

JV: Before 2010, lead times in the aluminum market in North America were rarely more than a month. Suddenly, the lead-time jumped as high as 10 months. Unprecedented lead times have produced unprecedented complaints.

MM: So, do you believe the LME rules need to be changed? Why or why not?

JV:   The rule has been there for many years. There is no trick. Nevertheless, it is considerably affecting those who are short the metal and those who hold LME warrants in the Detroit warehouses. Having said that, it is unreasonable not to have adjustments on the rules now that metal in warehouses totals over 4.6 million tons compared to 460k tons in 2005. In other words, it may sound reasonable to adjust the rules to the new reality. The unfair part could be changing the rules of the game for warehouse companies that decided to invest with a specific framework/rule of the game. It would make more sense to change the rules for new warehouse metal/capacity going forward.

MM: Do you think JPMorgan/Goldman/Glencore have in fact created an oligopoly? Why or why not?  

JV: These firms have always been savvy. I see no evidence of oligopoly. On the contrary, there are numerous reports of fierce competition among the warehouses.

MM: What do you think a fair solution would be? What should the LME do?

JV: Not that I’m in a rule-making capacity, but it seems to me that the LME could look at having a minimum load out depending on actual metal stored by a warehousing company per location. The minimum load out should increase as the metal stored increases. The proposed LME approach is in synch with this.

In order to be fair to the warehousing companies, most of the load out changes  should be aggressive at the margins. In other words, for new positions and warehouse volumes, for say a Metro International, the new rules should apply. In addition, I’d suggest that the LME announce the new rules ahead of time to give warehousing companies more than enough time to prepare.

MM: Can you explain to our readers when a firm buys metal via the LME, are they also committing to paying for all warehousing/delivery charges until they take possession of their metal?

JV: If they have an LME contract and they decide to inform the LME that they will take delivery, from that moment on, they will be responsible for the metal expenses (including storage). If the lead-time is seven months (as is the case in Detroit) they will be responsible for the storage related costs until the metal is shipped out.

MM: Why haven’t (or are they?) large metal buyers just gone ahead and offered a premium to big producers to buy directly to boycott the LME?

JV: Consumers suffering the most from today ´s high prices and premiums and long lead times were probably the ones that first decided not to approach their vendors/producers to lock in metal but to stay short or play it via the LME. Those consumers that indeed approached their vendors to lock in metal have managed to avoid today ´s high prices and premiums and long lead times. I suspect that going forward, consumers will be more willing to secure metal via their vendors/producers and less from the LME, which implies fewer consumers will play the short side of the trade.

MM: How does this process impact companies in the aluminum supply chain that aren’t the end-users, such as Novelis?

JV: Any company that didn’t secure and hedge all of their metal has been impacted. In the case of Novelis, they have publicly discussed how they would like to source 80% of their metal via the scrap supply chain vs. primary aluminum via the LME. My guess is that they are sick and tired of the complexities and games around primary aluminum and the LME.

MM: What is your advice for industrial buyers?

JV: My advice is to be proactive in the market with both sourcing and hedging intelligence. Order and hedge with vendors ahead of time and actively manage the position (you are never done with a position until metal is consumed).   You can ´t pass this responsibility to other parties. This is too strategic to leave it in the hands of the market.

Join us for a FREE upcoming webinar: “High Performance Metals & Alloys Market Outlook and Primer, featuring speakers Scott Fasse of United Performance Metals and Jorge Vazquez of Harbor Aluminum. Click here for additional details and to register.

–Lisa Reisman

Disclaimer: The author holds no positions in aluminum.

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