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Goldman Sachs turns aluminum and warehouses into money machine
In a rundown patch of Detroit, enclosed by a cyclone fence and barbed wire, stands an unremarkable warehouse that investment bank Goldman Sachs has transformed into a money-making machine.
The derelict neighbourhood off Michigan Avenue is a sharp contrast to Goldman’s bustling skyscraper headquarters near Wall Street, but the two operations share one important element: management by the bank’s savvy financial professionals.
A string of warehouses in Detroit, most of them operated by Goldman, has stockpiled more than a million tonnes of the industrial metal aluminum, about a quarter of global reported inventories. Simply storing all that metal generates tens of millions of dollars in rental revenues for Goldman every year.
There’s just one problem: much less aluminum is leaving the depots than arriving, creating a supply pinch for manufacturers of everything from soft drink cans to aircraft.
The resulting spike in prices has sparked a clash between companies forced to pay more for their aluminum and wait months for it to be delivered, Goldman, which is keen to keep its cash machines humming, and the London Metal Exchange (LME), the world’s benchmark industrial metals market, which critics accuse of lax oversight.
Analysts question why London’s metals market allows big financial players like Goldman to own the warehouses that store huge quantities of metal even as they trade the commodity. Robin Bhar, a veteran metals analyst at Credit Agricole in London, says the conflict of interest is so acute he wants U.S. and European antitrust regulators to weigh in.
“I think it makes a mockery of the market. It’s a shame,” Mr. Bhar said. “This is an anti-competitive situation. It puts [some] companies at an advantage, and clearly the rest of the market at a disadvantage. It’s a real, genuine concern. And I think the regulators have to look at it.”
Goldman said its warehouse subsidiary Metro International Trade Services has done nothing illegal, and abides by the LME’s warehousing rules. “Producers have chosen to store metal in Detroit with Metro,” a Goldman spokeswoman said. “We follow the LME requirements in terms of storing and releasing metals from our warehouses.”
The London Metal Exchange defends its rules. “There is a perception that consumers have not been able to get to their metal when the reality is that it is big banks, financing companies and warehouses that are not able to get to their huge tonnages of metal fast enough,” said LME business development manager Chris Evans.
Goldman’s warehouse business relies on a lucrative opportunity enabled by the LME regulations. Those rules allow warehouses to release only a fraction of their inventories per day, much less than the metal that is regularly taken in for storage.
In the year to June 30, Metro warehouses in Detroit took in 364,175 tonnes of aluminum and delivered out 171,350 tonnes. That represented 42% of inventory arrivals globally and 26% of the metal delivered out, according to the London Metal Exchange.
The metal that sits in the ware-house generates lucrative rental income.
For the rest of this article, please go to the National Post/Financial Post website: http://www.financialpost.com/todays-paper/Heavy+metals/5176230/story.html