Goldman (GS:US) Sachs Group Inc., the owner of the one of the biggest U.S. aluminum-warehouse networks, and the London Metal Exchange say commodity prices fell in recent years, countering claims of rising costs by beverage companies.
“Delivered aluminum prices are nearly 40 percent lower than they were in 2006,” Goldman said yesterday in a statement, and the LME said there is no “reported shortage” of the metal.
MillerCoors LLC, a SABMiller Plc (SAB) and Molson Coors Brewing Co. venture, said at a Senate subcommittee hearing yesterday that unfair LME rules used by Goldman, JPMorgan Chase & Co. and other warehouse owners boost costs and delay shipments. Senator Sherrod Brown, the committee chairman, plans to ask the Federal Reserve to explain why it allows banks to control raw-material supplies while trading in commodity markets.
“The real question isn’t whether prices have fallen the past few years, but whether prices are a true reflection of supply-and-demand conditions,” Jorge Vazquez, a managing director at Harbor Intelligence, an Austin, Texas-based research company, said in a telephone interview after the hearing. “Looking at the warehouse-business model is relevant. Significant changes in the system could improve fairness and efficiency.”
Tim Weiner, a global risk manager at Chicago-based MillerCoors, said in testimony that Coca-Cola Co. and Dr. Pepper Snapple Group Inc. share his concerns, along with manufacturers Novelis Inc. and Ball Corp. This year, MillerCoors will brew and ship more than 60 million barrels of beer in the U.S. and package 60 percent in cans and bottles made from aluminum.
About 95 percent of the aluminum used in manufacturing comes from producers and dealers outside of the LME warehouse system, Goldman said. The New York-based bank owns Metro International Trade Services LLC, which runs the most metal warehouses in Detroit. The city accounts for 80 percent of the U.S. aluminum stockpiles tracked by the LME.
Aluminum prices have fallen 40 percent since July 2008, the LME said yesterday in an e-mail statement. The exchange said it is legally restricted from limiting warehouse rents and can’t prevent trading companies from owning depots.
Global aluminum costs were inflated by $3 billion in the past year through “unfair” LME rules, Weiner of MillerCoors said in written testimony before his appearance at the hearing in Washington. The brewer didn’t specify how it reached that figure.
Backlogs have grown as more metal gets tied up in so-called financing deals, which typically involve the purchase of the commodity for nearby delivery and a forward sale to take advantage higher prices in the future.
While prices of aluminum for delivery in three months are down more than 40 percent since July 2008 on the LME, premiums charged on metals for immediate delivery 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 data from Harbor Intelligence. Premiums slipped this month after the LME announced new rules intended to cut waiting times.
Large amounts of metal accumulated at some locations as LME aluminum inventories more than tripled following the financial crisis, Goldman said in its statement. The bank said that warehouse companies played an “important role” during the financial crisis by allowing metal producers, unable to adjust immediately to changes in demand, to store excess metal.
Goldman Sachs, JPMorgan (JPM:US), Glencore Xstrata Plc and Trafigura Beheer BV bought storage companies in 2010.
Warehouse owners authorized to hold aluminum by the LME have created artificial limits on available supply, leaving prices “inflated relative to the massive oversupply and record production,” Weiner said.
Storage practices that have driven premiums higher forced aluminum users to wait more than 18 months in some cases for delivery, he said.
JPMorgan, Morgan Stanley (MS:US) and Goldman are among the lenders whose commodity trading is in jeopardy as the Fed 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 raw materials.
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.
Hong Kong Exchanges & Clearing Ltd. (388) bought the LME for $2.2 billion last year. The market in London is the biggest for aluminum, copper and other industrial metals.
Aluminum prices for delivery in three months fell 0.1 percent to settle at $1,845.50 a metric ton yesterday on the LME. The price has dropped 11 percent this year.
Randall Guynn, the head of the financial institutions group at law firm Davis Polk & Wardwell LLP, said at the hearing that banks probably boost commodity-market liquidity. Congress and the Fed, which examined bank involvement in raw materials, found that “the public benefits of these activities outweigh their potential adverse effects,” Guynn said in his testimony.
The banks own and control a wide range of energy assets, from fuel terminals to crude-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, the president of energy consultant Stillwater Associates in Irvine, California, said in a telephone interview. “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.
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