Global aluminum costs were inflated by $3 billion in the past year through unfair rules that allow Goldman Sachs (GS:US) Group Inc., JPMorgan (JPM:US) Chase & Co. and other warehouse owners to slow deliveries, said a risk executive at brewer MillerCoors LLC.
The practices of warehouse owners authorized to hold aluminum by the London Metal Exchange created artificial limits on available supply, leaving prices “inflated relative to the massive oversupply and record production,” Tim Weiner, a global risk manager at Chicago-based MillerCoors, said in written testimony before his appearance today at a U.S. Senate subcommittee hearing in Washington.
MillerCoors, a joint venture of SABMiller Plc and Molson Coors Brewing Co., uses aluminum to produce cans for about 36 million barrels of beer annually, and the metal represents the company’s biggest single price risk, Weiner said. The brewers concerns are shared by metal buyers including beverage makers Coca-Cola Co. (KO:US) and Dr. Pepper Snapple Group Inc. and manufacturers Novelis Inc. and Ball Corp., he said.
“We are challenged in managing our aluminum costs due to these LME warehouse practices,” Weiner said in the prepared remarks, which were posted yesterday on the subcommittee’s website. “The aluminum we are purchasing is being held up in warehouses controlled and owned by U.S. bank holding companies, who are members of the LME, and set the rules for their own warehouses.”
A Senate Banking, Housing & Urban Affairs Committee panel will examine whether banks should control commodities storage, power plants and refineries. Regulators need to take a “long, hard look at the practice of banks holding physical commodities,” the subcommittee’s chairman, U.S. Senator Sherrod Brown, an Ohio Democrat, said in a statement.
Michael DuVally, a Goldman Sachs spokesman, didn’t have an immediate comment.
The inquiry comes three weeks after the LME said it wants to help unclog growing queues at the repositories, which companies ranging from beer makers to wire fabricators say have reduced availability of aluminum and copper. Backlogs have grown as more metal gets tied up in financing deals that typically involve the purchase of metal for nearby delivery and a forward sale to take advantage of a market contango, where prices rise into the future.
Aluminum users are sometimes forced to wait more than 18 months for delivery because of “unfair” warehouse practices, Weiner said.
The LME said it’s trying to speed up withdrawals from warehouses where waiting times exceed 100 calendar days. Those warehouses would have to deliver more metal than they take in, based on a formula, the LME said in a statement July 1. Market participants are being consulted until Sept. 30, the exchange said. Its board is expected to review the plan in October, and the proposal would take effect April 1 if approved.
Premiums added to aluminum on the LME surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in the summer of 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.
Hong Kong Exchanges & Clearing Ltd. (388) bought the LME for $2.2 billion last year.
The Senate hearing adds to scrutiny from lawmakers and regulators on the participation of banks in commodities markets traditionally dominated by producers and consumers of natural resources.
JPMorgan, Morgan Stanley (MS:US) and Goldman Sachs are among the lenders whose commodity-trading is in jeopardy as the Federal Reserve reconsiders letting banks ship oil and store metal. The central bank says it’s reviewing a decade-old ruling to let deposit-taking banks trade physical commodities.
The banks own and control a wide-ranging portfolio of energy assets, from fuel terminals to oil tankers to solar-power plants. Goldman has contracts to buy fuel from at least five U.S. refineries, totaling 586,200 barrels a day in capacity. Morgan Stanley’s TransMontaigne Partners LP (TLP:US) runs oil terminals across the U.S., and JPMorgan has rights to electricity from three Southern California power plants.
“I don’t know why that’s a bad thing,” David Hackett, president of energy consultant Stillwater Associates in Irvine, California, said by telephone. “It adds liquidity.”
Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its businesses after a grace period given by the Fed ends in September. He declined to elaborate or to comment on the Fed’s announced rule review.
Brian Marchiony, a spokesman for JPMorgan, declined to comment on the review.
The Fed review and Senate hearing “mark the beginning of the end for the warehousing issue and may have far more painful implications for the banks in the future,” said Nick Madden, senior vice president and supply-chain officer of Novelis, the aluminum parts producer whose customers include Coca Cola and Ford Motor Co. He made the comments in a blog posting.
A “thoughtful review” of commodity warehousing is needed, based on how users say it is affecting markets, said Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission. The regulator, in a letter to companies, asked them not to destroy any documents relating to warehouses registered by exchanges such as the LME or Chicago Mercantile Exchange dating to January 2010, according to a copy of the letter obtained by Bloomberg.
“I doubt that there will be any immediate change -- phased change is more likely,” Mo Ahmadzadeh, a managing partner at Southold Capital in New York, said in an e-mail. “Certainly the confluence of attention from the Senate, the CFTC and the media will concentrate the minds of those who might imagine that their banking business may now have better points of focus.”
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