MetalMiner has recently reviewed the news release issued by Goldman Sachs last week. Goldman Sachs makes a number of points of clarification with regard to its activities as a market maker and why it holds aluminum inventory positions.
MetalMiner has no opinion about Goldman’s inventory positions and, in fact, concurs with others that Goldman Sachs has the legal right to own and hold physical commodities in inventory. The Federal Reserve agreed in 2003 to allow banks to own warehouses and trade in commodities.
However, we couldn’t resist a bit of “Point, Counterpoint.” The following comes directly from Goldman Sachs’ website with MetalMiner commentary following (“MM”):
“During the financial crisis, warehouse companies played the important role of allowing metal producers, who are often unable to adjust immediately to changes in demand, to store excess metal in the face of weak consumer demand. In fact, LME aluminum inventories more than tripled from 1.2 million tonnes pre-crisis to more than 4.5 million tonnes by the middle of 2009. As a result, large amounts of metal accumulated at some locations.”
MM: No argument there, except low interest rates (otherwise known as cash and carry) didn’t harm the arrangement.
“Recent news reports have inaccurately accused Metro of deliberately creating aluminum shortages and incorrectly asserted that Metro moves aluminum from one warehouse to another in order to earn more rent fees. In fact, it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives.”
MM: Contrary to recent press coverage, Goldman Sachs is yet again correct. Customers that wish to pull their metal out of a warehouse present a canceled warrant to demand their metal. However, what Goldman Sachs has failed to say involves the rules by which it loads out metal. Let’s take an example. If the minimum LME load-out rate is 1,500 tons per day per warehouse, but on a particular day, the warehouse received canceled warrants totaling, say, 5,000 tons of metal, what does the warehouse operator do? It releases 1,500 tons (as per LME rules) and holds 3,000 tons (and charges for any additional days that it holds the metal). Some believe the current wait time to receive metal after the submission of a canceled warrant is 19 months. The cynic may suggest, what is to stop the warehouse owners such as Goldman from buying and selling their own inventory, thereby artificially increasing the volume of metal queuing to leave the system and adding to the wait time? We don’t have hard evidence of this, but in a self-regulated market, such practices could proliferate.
“Some additional key facts about global aluminum markets and the LME system: Aluminum stored in Metro warehouses amounts to approximately 1.5 million tonnes, compared with global aluminum production in 2012 of about 48 million tonnes.”
MM: This is misleading. Goldman is comparing metal stored in US warehouses with global aluminum production. An apples-to-apples comparison would compare metal stored in US warehouses against US aluminum production in 2012 (which is actually about 2.2 million tons). So Goldman holds 1.5 million tons out of a possible 2.2 million tons or 68% of total US aluminum primary supply.
What about alternative sourcing and aluminum prices? More to come in Part Two.