It’s taken a year, tied up thousands of hours of attorneys’ time, caused the biggest shake up in the LME’s warehouse rules in decades, instigated ongoing regulatory scrutiny and polarized sectors of the aluminum industry, but finally the antitrust litigation case that has rocked the aluminum industry has been dismissed.
The WSJ reports U.S. District Judge Katherine Forrest in Manhattan dismissed the case against Wall Street banks and commodity merchants including Goldman Sachs Group Inc, JPMorgan Chase, and Glencore Plc of conspiring to drive up aluminum prices by reducing supply. In an 85-page report Judge Forrest said there was no indication the defendants intended to manipulate prices, though it was clear that their actions affected the aluminum marketplace. Judge Forrest is quoted in the WSJ as saying “As cast in the complaints, this was an unintended consequence of rational profit maximizing behavior rather than the product of conspiratorial design.” The ruling comes fast on last month’s dismissal of a case against the London Metal Exchange on the grounds tha,t as an organ of the British Government, it was above prosecution.
Few would argue the warehouse companies and their owners have benefited financially from their control of the LME warehouse system since aluminum stocks mushroomed in the wake of the 2008 financial crisis. The concentration of warehouse space in the hands of very few operators in certain locations gave those firms unprecedented control and leverage.
Backed by owners who were also either massive position players in their own right or traded on behalf of clients, or both, the players were able to entice in and then retain inventory particularly in Detroit and Vlissingen, but also to a lesser extent in other locations like New Orleans. As a result, physical delivery premiums have sky-rocketed causing losses and inflated risks for consumers unable to hedge or control this element of their delivered costs. True the LME price has on average been lower this year than in 2010-13, but the physical delivery premium has never been higher.
Judge Forrest does not say the banks and traders activities did not affect the market, that is a fact not even the warehouse firms themselves would deny, what she appears to be saying is that it wasn’t their intention to manipulate the price. Their intention was to attract in as much metal as possible – hence the physical delivery premiums rising as incentives – and hold on to it for as long as possible – to secure the benefit of the rent while in the exit queue.
This, apparently, was acceptable behavior and the fact consumers suffered as a result is considered an unintended consequence rather than an intended consequence. You have to ask if you know what you are going to do is going to cause another party losses and incur them in costs yet you go ahead with the sole motive of maximizing your own profit then is that acceptable – maybe legally it is.
Maybe the failure, here, is in proving the parties colluded in their activity? The probability that they acted independently but in full knowledge of what the other parties were doing doesn’t count as collusion. The problems at the LME warehouses occurred in part because of a lack of competition. There were so few operators in some locations and they so totally dominated the market in those locations they could profit from that monopolistic position. You don’t have to cover 100% of a market to control it.
The warehouse operators would point to the stock and finance trade as the real villains, it was their insatiable consumption of primary aluminum that incentivized the payment of delivery premiums. Those bankers, traders and hedge funds are the parties that have driven the inexorable rise in LME inventory. In some cases that may be the same parties such as Goldman Sachs or Glencore, but in many other cases it is a showy collection of players on a very opaque playing field.
Most of the plaintiffs have been told they will not be able to appeal, those that haven’t are said to be considering their position. The LME warehouse story is clearly not at an end, but it may be at the beginning of the end.