The metal-hoarding controversy

What's happened?

Two of the biggest global banks, Goldman Sachs and JPMorgan Chase, are being sued in America over claims that they manipulated global aluminium prices by hoarding the metal at warehouses owned by subsidiaries.

Goldman owns 27 warehouses in the Detroit area through Metro International, acquired in 2010, and is being sued in Michigan by aluminium purchaser Superior Extrusion, which has also named other warehouse owners and the London Metal Exchange (LME) as defendants.

JPMorgan is being sued in Florida by aluminium purchaser Master Screens Inc, and by Daniel Price Bart, a Tallahassee resident, described in the legal filing as a "purchaser of beverages sold in aluminium cans" a man who presumably reckons he is paying over the odds for beer or fizzy drinks because of the alleged price-fixing.

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Is there any truth in the claims?

Both banks dismissed the claims and say they will contest them vigorously. But the suits filed last week which are likely to become wider class actions have raised questions about what investment banks that trade metals are doing owning the warehouses that store them.

At the very least, there is a conflict of interest. Or, as the Florida filing puts it: "By inserting itself [sic] into a healthy industry producing widely needed commodities, severely degrading functionality and widely distributing costs while itself benefiting, Goldman Sachs and JPMorgan couldn't fit a more archetypal description of a parasite on the markets".

What exactly is Goldman accused of?

An odd sort of hoarding that appears to be encouraged by the arcane rules of the LME, which regulates the trading and storage of commodity metals across Europe, North America and Asia. Goldman doesn't own physical aluminium itself but it owns some of the huge warehouses where other banks, traders and producers pay to store it. That is a lucrative business: Goldman bought Metro International for $550m in 2010, and at a going rate of about 48 cents a ton for storage, it enjoys revenues of about $250m.

But not content with such a profitable sideline and one that gives it a massive informational advantage when it comes to trading the metal Goldman is accused of deliberately dragging its feet when shipping the metal from its warehouses.

What is it doing wrong?

According to an investigative piece in The New York Times last month, Goldman is manipulating the system by shuffling aluminium back and forth between warehouses. That "commodity shuffle" technically meets the requirements of LME regulations, which stipulate how much metal should be shipped out each day, but means that producers who want their metal face long delays. According to the paper, the time it takes buyers to receive the metal has shot up from six weeks when Goldman acquired the business in 2010, to an astonishing 16 months now.

Is it just Goldman?

No. According to Barclays' research, metal storage centres where delays are longest are Detroit and New Orleans in the USA, Vlissingen in the Netherlands, Antwerp in Belgium and Johor in Malaysia. Detroit is dominated by Goldman's Metro. But Glencore-owned Pacorini Metals has the most storage units in Vlissingen, New Orleans and Johor. In Antwerp it's NEMS, a unit of Trafigura.

According to The New York Times, delaying tactics have cost US industry and consumers an estimated $5bn over the past three years in higher prices for cars and beer cans. That figure might sound huge, but the costs are not limited to delays: under the arcane formula used to determine metal costs on the spot market, storage costs are a major factor. That means Goldman's tactics and those of similar organisations mean higher prices for everyone, according to their critics.

What does Goldman say?

In response to the NYT article and Senate hearings into the matter last week, Goldman pledged to slash queues and give customers who need physical aluminium priority over traders. They concede that longer queues are a factor in the premium of physical metal over the spot price but even allowing for this, they say the aluminium price is down 40% since 2006.

Moreover, aluminium stored by Metro accounts for 1.5 million tonnes, compared with global production of 48 million tonnes last year. And about 95% of the metal used in manufacturing is sourced outside the LME system. All of this may be true but it is unlikely to be enough to satisfy suspicions that Wall Street banks have got around regulations supposed to minimise risk by preventing banks from owning commodity infrastructure. Time for the regulators to raise their game.

The dark inventory game'

The queues at warehouses "are not the scam", says Izabella Kaminska in the FT. "They are just a very welcome side-effect of the 'dark inventory' game. It's the dark inventory that sits in the system, unseen by public eyes being declared on- or off-warrant according to trader whims which is getting in the way of standard warehouse operations."

The bigger picture is that by getting into the warehousing of physical commodities, Goldman and other banks took timely advantage of a 'super-contango' in the metals market in 2008/2009 (ie, a trading curve where the spot price moves lower than the forward price for a sustained period). Now they are reaping the rewards. That might be clever, but it's not illegal.