Bloomberg News

Barclays Buys Stake in Warehouse Owner Erus Metals, Person Says

September 02, 2011

Sept. 2 (Bloomberg) -- Barclays Capital took a stake in U.K. metals-warehousing company Erus Metals Ltd., which is seeking approval to store London Metal Exchange inventories, according to a person with knowledge of the transaction.

Barclays will control the stake jointly with steel and raw- materials supplier Metalloyd Ltd., the person, who declined to be named, said yesterday by phone. A third company will own the remaining holding, according to the person. Erus, based in Witham, England, is awaiting LME approval to register its warehouses as part of the exchange’s network, the person said.

Ownership of the Erus stake will enable Barclays, one of 12 dealers on the LME’s floor, to reduce the cost of storing metals. The company is moving into warehousing after banks and commodities traders including Goldman Sachs Group Inc. and Glencore International Plc took control of storage companies.

“If you are running financing deals as a bank, then it makes more sense to run your own warehousing because you can better manage costs,” David Wilson, an analyst at Societe Generale SA in London, said by phone today. Such transactions involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal.

Henry Bath

Metalloyd, based in London, referred calls to Barclays Capital. Barclays Capital spokeswoman Aurelie Leonard in London declined to comment. Erus also declined to comment. Metalloyd is controlled by brothers and billionaire real-estate investors David and Simon Reuben.

Goldman Sachs bought Metro International Trade Services LLC last year, while JPMorgan Chase & Co. took control of Henry Bath & Son Ltd. on acquiring units of RBS Sempra Commodities. Glencore, the largest listed commodity trader, took over Pacorini Metals, Noble Group Ltd. acquired Delivery Network International LLC and Trafigura Beheer BV owns North European Marine Services Ltd.

Banks’ ownership of warehouses has cast doubt on the effectiveness of information barriers, commonly known as Chinese walls, between different units of the same company.

“There is a high degree of skepticism outside the banking community that Chinese walls will be effectively implemented,” Wilson said.

No Investigation

The Office of Fair Trading, the U.K. antitrust regulator, said in June it wouldn’t investigate LME trading firms operating warehouses for market violations, citing a lack of evidence. The U.K. Parliament’s Science and Technology Committee published a report in May asking the OFT to look into whether the practice was anti-competitive.

The LME is seeking views on introducing third-party verification of barriers’ effectiveness. The policy would require warehouse companies to engage accountants to confirm that the barriers meet criteria specified by the exchange.

The exchange’s executive committee and board will review comments on the proposal after Sept. 30, Chris Evans, head of business development at the LME, said Aug. 22.

Erus was registered as a U.K.-based company in September 2010, according to Companies House, where all businesses located in the country must register. Alec Gunn is currently Erus’s director and also sits on the boards of other Witham-based businesses including food processor Fanpac Ltd., Companies House documents show.

The LME, the world’s biggest marketplace for industrial metals, has approved more than 600 warehouses and compounds worldwide in 37 locations, according to its website. At least 30 companies are authorized to store LME metals. Depots are selected based on criteria such as access to highways and the ability to meet minimum daily delivery rates to clients, known as the load-out rate.

--Editors: Dan Weeks, Sharon Lindores

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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