Just a Reminder: "US regulator approves BlackRock's copper ETF plan" and "Blackrock: ETFs are the true market" (BLK)
Original post:
The title is from and the hat tip goes to naked capitalism.
Among the journalists who follow this stuff this is an old story, for the rest of the world this NYT article may be a revelation. One thing to keep in mind there are two distinct groups making money off the warehouse biz: 1) the warehouse owners who pocket $3.75 mil per day in rent and 2) the folks who do the financial deals using the metal as collateral. Sometimes the banks are involved in both using the same metal.
A lengthy (5 pages) piece from the New York Times:
The House Edge
A Shuffle of Aluminum, but to Banks, Pure Gold
MOUNT CLEMENS, Mich. — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process “a merry-go-round of metal.”Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets, according to financial records, regulatory documents and interviews with people involved in the activities.The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million.Using special exemptions granted by the Federal Reserve Bank and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers — from pipelines and refineries in Oklahoma, Louisiana and Texas; to fleets of more than 100 double-hulled oil tankers at sea around the globe; to companies that control operations at major ports like Oakland, Calif., and Seattle.In the case of aluminum, Goldman bought Metro International Trade Services, one of the country’s biggest storers of the metal. More than a quarter of the supply of aluminum available on the market is kept in the company’s Detroit-area warehouses.Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.Goldman Sachs says it complies with all industry standards, which are set by the London Metal Exchange, and there is no suggestion that these activities violate any laws or regulations. Metro International, which declined to comment for this article, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal. But interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.(Page 2 of 5)
Metro International holds nearly 1.5 million tons of aluminum in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, according to the interviews. Instead, it is shuttled from one warehouse to another....MUCH MORE
This article has been revised to reflect the following correction:
Correction: July 20, 2013
A previous version of this article misstated one of the financial institutions that received approval to buy up to 80 percent of the copper available on the market. It is BlackRock, not the Blackstone Group.Reuters and especially the Financial Times' Alphaville blog have been on top of this almost from the time the big banks started buying the warehouse companies back in 2010. Here's some FTAV:
2010
Is ‘cash for commodity’ the biggest trade in town?
Just like a giant secured loan to commodity producers
2011
The UK is concerned about banks that warehouse commodities
Please wait 10 months for your aluminium. Thank you
LME warehouse recommends upping load-out rates
Welcome to ‘synthetic warehousing’
Let’s count the copper with dust on it
2012
Goldman on metal pawning
2013
An upcoming dehoarding effect in metals?
Deripaska on the collateralisation of aluminium
Collateral crunch, commodity financing edition
And many, many more.
We also have quite a few posts, here's the Google site search:
site:climateerinvest.blogspot.com warehouseThe first three of 251 hits:
Want to Get Copper Out of the Warehouse? Pay a Premium (there's $3.75 mil per day being made)
End Users Close to Telling LME, Warehouses: "Go To Hell"
Playing the LME Copper Warehousing Game: New Loadout Rules May Have Increased Financing Deals
