Thursday, October 24, 2013

Dear Goldman Sachs: What Happened to "Goldman to offer Metro customers immediate access to aluminum" (AA; GS)

This is turning into quite the little scam exposé.
Back in July when the rest of the business media caught up to what Reuters and the Financial Times (Hi Izzy) had been covering for over a year we saw "Goldman to Deliver Aluminum to Warehouse Customers" at the Journal and "Goldman Sachs Offers Aluminum to Clients Stuck in Queue" at Bloomberg.

Turns out Goldman was just making cooing sounds for the regulators and end users.

A point in favor of the U.S. based media behemoths, they may have been late to the story but since the New York Times article (A Shuffle of Aluminum, but to Banks, Pure Gold) that seemed to get the regulators attention, Bloomberg and the Journal have stuck with it.

From Bloomberg Oct. 23:
Aluminum Premiums’ Gain Seen Driven by Surging Withdrawal Orders
Premiums added to aluminum prices in the U.S. and Europe rose amid surging orders to remove the lightweight metal from warehouses monitored by the London Metal Exchange, Harbor Intelligence said.
The surcharge reached 9 to 9.8 cents a pound in the U.S. Midwest, against 8.5 to 9.5 cents two weeks ago, according to the Austin, Texas-based researcher. The European premium rose to $190 to $200 a metric ton from $150 to $170, it said. Waiting times for withdrawals lengthened at the two biggest global repositories as bookings soared, according to Harbor.

Canceled warrants, as the orders are known, jumped 12 percent so far this month, poised for the biggest increase since December, according to daily LME data compiled by Bloomberg. Premiums are rebounding from the lowest levels in more than a year, reversing a slump caused by an LME proposal to increase delivery rates from warehouses.

“Firmer premiums are the result of the cancellations that we have seen in the past weeks, without any doubt,” Jorge Vazquez, Harbor’s managing director, said by phone yesterday. “The queues have lengthened considerably.”

The surcharges are added to the price of metal for immediate delivery on the LME, which oversees more than 700 warehouses around the world. The premium for Europe excludes European Union import duties.

18 Months
Canceled warrants are up 4.9 percent in October in the Dutch city of Vlissingen, the biggest storage site for LME aluminum, and 21 percent in Detroit, which ranks second. That equates to respective net increases of 46,500 tons and 178,475 tons. Waiting times for removal lengthened to a near-record 18.9 months in Detroit from 17 months on Oct. 14 and 18 months in Vlissingen, compared with 15.3 months on Oct. 4, Vazquez said.

“The patterns that we’ve seen in the LME warehousing system, specifically Vlissingen and Detroit, haven’t changed,” he said. “The cancellations are exactly the same pattern that we have seen since 2011, so it seems to me that nothing has changed here and only the LME approval of the proposal may be a factor for these patterns to change.”...MORE 
And from FT Alphaville Oct. 24:
Warehouse queue conflicts
The Wall Street Journal has been digging deeper into the metals warehouse logjam issue, and discovered that both Alcoa and Rusal may be beneficiaries of the situation due to the physical premiums they collect when end-users are forced to go direct to producers for metal so as to avoid queues.

According to the WSJ the aluminium makers have reaped as much as $1.4bn in revenues from higher fees due to the logjam.

The story then suggests this strips the credibility from their objections to proposed LME rules to ease the bottleneck.


Now, it’s definitely the case that there seems to be a conflict of interest. However, when you look closely at the complaints of both Rusal and Alcoa, you realise things aren’t necessarily that simple.
For one thing, Rusal’s Oleg Deripaska was one of the first to openly draw attention to the dislocations that were happening between physical and paper prices due to the financialisation of metal markets. This was at a time when most banking analysts were entirely dismissive of such assertions and propositions.

We know this because FT Alphaville has been writing about inventory-generated dislocations (and how they are ultimately fuelled by passive speculator products such as ETFs) since at least 2010 and has had more than its fair share of “this is just baloney” feedback from official sources.

Deripaska, however, very specifically criticised the role of hoarded inventory, or as he put it in the FT in September 2012:
The average share of aluminium locked in the LME warehouses under financial deals stayed at an average of 65 per cent in the second quarter. Capital inflows driven by index investors and hedge funds in particular have distorted the supply/demand equilibrium, sending a wrong signal for the players in the market.
What would be the point of Deripaska outing the aluminium squeeze if he was so happy to just sit back and collect the premiums that the situation created?....MORE
The Oct. 21 FT story, "Alcoa attacks ‘short-sighted and misguided’ LME" sounded very strange:
...In response, the LME has proposed a change of rules that would eventually bring down the length of queues.

But Alcoa criticised the LME’s apparent focus on bringing down “premiums” – the cost of physical aluminium over and above the LME futures price – which have soared to record highs thanks in part to the queues. 

Klaus Kleinfeld, Alcoa’s chief executive, said the move would “set a dangerous precedent of market intervention by an exchange”.

The rise in premiums has been a lifeline for aluminium producers amid sliding futures prices. However, Mr Kleinfeld rejected the suggestion that Alcoa’s intervention was based on its own financial interest, noting that the company is also a user of aluminium and therefore “we sit on both sides”....
Until you realize that yes, Alcoa is playing both sides.