Glencore’s Pacorini Accused of Market Manipulation

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zinc bars
Björn Wylezich/Adobe Stock

If at first you don’t succeed try try again, the old saying exhorting stubborn determination goes, and so it seems the case for metals consumers who believe they have been unfairly forced to pay higher metal costs than should have been the case.

Two-Month Trial: Metal Buying Outlook

On this occasion, I speak not of aluminum consumers but of those buying its sister metal zinc. Last year a case for monopolistic and anti-competitive behavior was brought against the trading arms of JPMorgan Chase, Goldman Sachs and Glencore under antitrust law in New York citing the Sherman Act Section 1, and 2.

After due consideration the case was thrown out in January of this year on the grounds that the plaintiffs — those claiming they had suffered from unnecessarily higher prices — had failed to prove unlawful agreement between the three, i.e. collusion. Or to prove that they colluded with the London Metal Exchange to set unreasonably low load-out rates and other storage conditions that allowed the three to support higher prices. As is often the case in law, the plaintiffs’ case fell down on lack of evidence, the arguments had a certain plausibility but there was little or no evidence to back them up.

The Case Against Pacorini

So, still convinced of wrongdoing, a number of zinc consumers went back to the drawing board, or more accurately started to secure some hard evidence that would support their case. According to Reuters what they have allegedly found is evidence that Executives at Pacorini, Glencore’s warehousing unit, allegedly ordered workers to falsify documents in New Orleans to manipulate the zinc market.

Two key witnesses are ready to testify that workers created false bills of lading during 2012 to mask high volume movements of zinc.

“The falsified bills of lading contained false signatures, stated that the metals were picked up by truckers that ‘never existed,’ and sometimes contained incorrect tonnage amounts,” the complaint submitted to a U.S. judge in Manhattan is said to claim.

The case alleges Glencore, along with with several other large trading companies in late summer or early autumn of 2012, is also accused of a “synchronized” and “highly coordinated” schedule of zinc warrant cancellations at warehouses in New Orleans, according to the complaint.

Premiums Again the Center of Controversy

The intention being to manipulate daily reports sent to the LME about warehouse movements of zinc and therefore the price at key times. The complaint also alleges that the false documents played a part in manipulating backlogs of zinc waiting to be delivered, which pushed up the zinc premium, (the Midwest Zinc SHG premium) a surcharge buyers pay for immediate delivery of physical metal, and closely linked to load-out queues and, hence, prompt metal availability.

The case is a private antitrust lawsuit and the judge has given approval for it to go forward to the discovery stage giving both sides the chance to build their cases before going to trial.

Whether the court gets to trial and finds against Glencore remains to be seen. Through Pacorini, Glencore certainly has a dominant position in the New Orleans zinc market so any actions it takes, legal or otherwise, can have a disproportionate effect on premiums in that location. As the majority of U.S. zinc is stored in New Orleans, it, therefore, follows such actions impact the whole U.S. market via the resulting Midwest SHG delivery premium.

Off-Warrant

The reporting of movements of metal can have a pronounced impact on the zinc price, particularly if timed correctly. Whether it was intentional or not, in the third quarter of last year almost a quarter of a million tons of zinc were delivered on LME warrant, just about all of it in New Orleans. That caused prices to drop as investors realized the scale of off-warrant zinc stocks was larger than had appeared.

This metal was not newly manufactured, but off-warrant metal held by traders like Glencore, and hedge funds as part of the stock and finance trade. The reverse can be true if metal appears to leave the LME system, it is assumed it is being consumed and can support the price.

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Citibank has estimated such off-warrant stocks could amount globally to 2.5 to 3.0 million metric tons, dwarfing the approx. 345,000 mt in the LME system. Whether such movements were made with the intention of manipulating the zinc price is for the court to decide — and good luck to them, they will have their work cut out. It is no accident that Pacorini set up shop in a non-zinc consuming area like New Orleans, or that they took such a dominant warehousing position in the city. There are advantages to be had. What the court has to decide is are those advantages anti-competitive and has Pacorini and Glencore abused their collective position?

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