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Sunday, August 4, 2013

Heavy Meddle

The Ring at the LME
(bullionstreet.com)
Who runs the London Metal Exchange? Soooooo glad you asked.

There are currently 12 Ring members (and a few known associates), with dealing privileges at the LME. i.e.:
What's Past Is Prologue, My Friend.
(Cargo Ships, 1859)
Back in the day, after buying aluminum at The London Metal Exchange, it would take months and months to acquire it. Long voyages incurred extra costs that could really add up. And who knew what the market would bear when your ship came in. Prices would fluctuate, and that cargo might be bought and sold many times before it actually arrived.

Hedge Hogs
LME - with the six primary metals traded on the Exchange, provided investors access to futures (hedge bets) and traded options (hedge bets) during those windows in travel timeThe trades are done without the physical delivery, storage and transaction costs associated with the underlying commodity contracts. At the LME, the member banks just trade pink slips around. Tracking the storage of metal stockpiles through a vast network of approved warehouses, the LME has flourished, though never more so than right now in terms of trading volume.  In addition to whatever effect hoarding has on hedging, a warehouse storing the actual commodity makes bank on their tinny tenants.
.
Who's keeping an eye on American metal prices?
(Franklin Mint, 2006)
"In the days when the system worked efficiently, you could get metal out of the LME warehouse network in 48 hours. In those days, small- to medium-sized consumers regularly used the LME as a source of supply." said Lisa Reisman of Metal Miner, a leading global metals market rag, in response to Goldman Sachs' press release from last week.

Fashionably Late
This week, Metal Miner reported that in 2013 the current wait time for metal delivery is, wait for it, 19 months. 19 Months!! Why? The report was talking about Detroit. The city that went that to sleep. It's not like the trucks are getting stuck in traffic!

When translated, the July 23rd Goldman Sachs' press release reads: 'These are warehouse issues. These things just take time. We are only talking about 3% of the metal market, really. Most of these warehouses don't own what they store, you silly journalists, you. Seriously, there is nothing to see here folks. The warehouses don't HAVE to move more than 1,500 tonnes a day per warehouse company, per city, anyway.'

"The cynic may suggest, what is to stop the warehouse owners, such as Goldman, from buying and selling their own inventory while in storage, thereby artificially decreasing the amount of metal in the system, artificially increasing the sale price, and artificially adding to the wait time?" suggested Metal Miner. When pressed, Ms. Reisman offered, "We don’t have hard evidence of this, but in a self-regulated market, such practices could proliferate."

Associate Members of The Ring are all big traders as well as finance players. Glencore owns vast quantities of metal, and also owns the warehouse giant Pacorini. JPMorgan works the same way.

Gaining Weight
According to Forbes, "in 2010, metal stockpiles held in depots registered with the LME swelled to 6 times that of 2007's reported levels – bringing in unprecedented storage revenues from clients who stockpile their metals in warehouse locations. Through its purchase of Metro International, in 2007, Goldman Sachs owns the biggest warehouse in the LME system. By 2010, these Detroit hangouts held a quarter of the aluminium stored in the Metal Exchange’s facilities." That's right 25% of the world's aluminum. Not 3%. And that was back in 2010.

"It's driving up costs for the consumers, and it's not being driven up because there is a true shortage in the market. It's because of an issue of accessing metal ... in Detroit warehouses," said Nick Madden, chief procurement officer for Novelis, the world's biggest maker of rolled aluminum products.

By 2011, Goldman was raking in $378,000 per day in storage costs from those sleepovers in Detroit, which were imposed on customers for months even after they had requested to have their metal removed. In other words, Goldman Sachs was charging (just for storage of the commodities they were also trading) more than $11 million a month, for month after month, to store aluminum they were supposed to deliver upon purchase. They even encouraged clients to buy metals as part of their portfolios, and kindly offered to warehouse those investments as well.

Hoarding Aluminum
The Pause That Refreshes
In 2011, the only one complaining loudly about aluminum shortages was Coca-Cola, and how much sympathy can you really feel for Coke? So no one really listened. This had the effect of driving the cost of aluminum in the US to the highest level in more than a decade.


Of course, that was then. And this is now. And now we know that there are trucks pretending to actually deliver "physical commodities" traveling in circles, in lower Detroit. And every time they pass go, they collect.

With each delay, they collect. With each side bet on futures, they collect. With each transaction fee, they collect.

He Ain't Heavy, He's My Banker.
The banks owning these warehouses make money on mining, distributing, warehousing, hedge betting, distributing, trading, selling, more warehousing, distribution, smelting, and price fixing. It's not just a cent on a can.

It's easier to think of our corporations as responsible marketers and distributors of goods and services to the people. Stewards of the world's consumers, do no harm sort of thing. But then, we should know better. For some reason, when Americans hear all the gory details of this syphoning of cash from the monetary system, we just let the info self destruct. We go on no mission. We make no signs. Our eyes glaze over, and we crack a can of beer, sitting back in our aluminum lawn chairs made in China, BBQing on our aluminum grills on these hot days, and generally enjoying the sounds of summer.

"Walmart has everything we need" you say, "everything's made in China and that's pretty cheap, so what's all the hubub about?" You should be happy to know that The London Metal Exchange was wholly acquired by Hong Kong Exchanges Clearing Limited last December.

Gilt Complex
Then JP Morgan announced they were quitting the physical commmodities business. That happened. The announcement came just three days after a powerful Senate banking committee heard from experts who said that metals warehouses owned by Wall Street and other commodities traders were distorting markets and even driving up the cost of aluminum cans for beer and soda. "Some said allowing them to trade in physical markets was a risk to the financial system." - Reuters. Does this also mean that Morgan Stanley, JP's long lost cousin, is stepping out of The Ring? We'll have to just wait and see.

On the 28th, Forbes recalculated their original 3% theory. Goldman Sachs Actually Holds Close To 25% Of The US Aluminum Supply, Maybe More, they headlined.

Too Big To Fail
In reality, an apples-to-apples comparison would contrast metal stored in US warehouses against US aluminum production in 2012. Last year, Goldman stored 1.5 million tons out of a possible 2.2 million tons, or 68% of total US aluminum primary supply. And that's just one metal, and one bank, storing in one city, they were to big to help.

They know we are waking up. So now it's up to you? Your mission, should you decide to accept it, is to share the information. Share it liberally. Break it down for those Republican friends of yours who think corporate tax rates are too high and it's stifling business growth.

This message will self destruct, only if you let it.

The Policy Geek

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