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.:

• UBS
• JP Morgan
• Morgan Stanley
• Koch Metals (of course The Kochs are in this story)
• Goldman Sachs
• Credit Suisse (Europe)
• MAREX Financial
• Deutsche Bank
• Citigroup

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 time. The 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

Sachs of Gold II

Detroit. The Motor City. Motown.
What's in a Name? Hockey Town. City of Champions. Rock City. The culture that inhabited this space in Michigan has left its imprint on generations. When we drive, when we sing, when we dance, there will always be a little Detroit in all of us. Yesterday we sang the ballad of The Big D, and how it became one of the most profitable cities in the world. Not back in the 20s, or 50s, but now, right now.

Detroit Today

From the days of prosperity and growth, we've seen a slow motion slip into poverty. Generationally, parts of the city were just abandoned. We hear horror stories, we see photos, and it all sounds just awful. Property values crashed. Businesses tanked. Blocks and blocks of empty houses. Who would want to live there now?

Most of the talk show chatter focuses on the bankruptcy details. NBC asks, "If Detroit is allowed to stop or shorten payments to their retirees, will states like California or Illinois follow suit?" CNN warned, "Large, unfunded pensions for city and state workers across the US are looming liabilities", and Chris Mathews added, "Detroit is the canary in the coalmine. If they get away with going bankrupt, not delivering on pension promises, we could be looking at a domino effect in the future."

Living in a World of Their Creation
There's alot of talk around Detroit and its problems. But no talk about a little district in Detroit known as Hamtramck. Try to say that out loud, and you'll get some idea of why no one talks about Hamtramck.

Hamtramk is home to the now famous Goldman Sachs' warehouses, that make billions a year, while producing nothing at all. It sits in the center of the bankrupt community of Detroit, the city that went broke. Flat broke. Emergency managers were put in charge of towns all over Michigan. With a swipe of the Governor's hand, venture capitalist Gov. Snyder (R) completely replaced elected officials to help "manage" "low income" areas, and quickly, things went from worse to over.

To make sure you are up to speed at this point, The Daily Show, as usual, offers a somewhat concise update, so grab a cold one, enjoy the laugh, we'll see you back here in five.

The Daily Show July 25, 2013 ~~ We suggest starting at :35

Who's In Charge Here?
In the video from our last blog post, we left off with an NBC interview of beloved Sen. Sherrod Brown of Ohio (D), who currently sits on the Senate Banking Committee. Brown said he had no idea where the metals market oversight was based. Who made the rules, anyway? How can we end this national scam in practice? Who's going to take responsibility here?!?

Inside the Goldman Sachs Aluminum Warehouses of Hamtramck
(Detroit, Metro International.com, 2013)

A World of Pure Imagination
Say you are what the banks call a 'consumer'. You use commercial grade aluminum in bulk to produce cars or planes, crutches or the great American gift of soda cans, or whatever, somewhere in the world. Well, ya can't just go down to ye olde local aluminum store. No. If you want that kind of aluminum (or zinc, or copper), you're gonna need a warrant. There is only one place in the world to get that canceled warrant of purchase, wait for it, from a coven of members known as The Ring who run the London Metal Exchange. Seriously.

Regardless of where metal is stored after being mined, consumers around the world fill their metal needs at global prices set by business conducted in The Ring.

What's in a Name?
A holdover from the days of yore, when Britain ruled the world, if you want to buy aluminum, you need to do it in London. To start with, this isn't really new news. International metal trading began in Britain when the Romans invaded in AD43, but by the early 19th century, there were so many commodity traders at court, it became impossible to do business. As a result, individual groups of traders set up shop in the coffee houses of London. A merchant with metal to sell would draw a circle in the sawdust on the floor and call out 'Change', at which point all those wishing to trade would gather around in a circle, or ring, and make their bids and offers. The name stuck.

Change You Can Believe In
None of this was a fast process. Shipments took months and months to come in from all over the world. The need for a central unit to watch over the purchases, and deliveries of these metals, made it necessary to create a watchdog organization.

In 1877, LME was founded to oversee the locations, travel times and price changes of the world's trades in metal. Over time, they incorporated oversight of other commodities, as well. Since the process was slow as molasses, this was rather easy to do.

LME traded copper and tin since its inception. Lead and zinc since 1920. Special high grade zinc since 1986. Primary aluminium was introduced in December 1978. Nickel trading started in April 1979, and the featured commodity of this news cycle, aluminium alloy, was added in October 1992. Later, cobalt and molybdenum, were included. Fun Fact; molybdenum is a superalloy, stronger than all the rest, made up of oxidized minerals.

Copper Ingots Stacked
(Minersweekly.com, 2010)

Today, 80% of the world's aluminum is, at one point or another, held in a warehouse that is part the LME system. The remaining 20% comes from scrap metal, or from secondary metal processors, who originally picked up their raw aluminum from an LME warehouse.

If you are still awake and reading, god bless you. Seriously. This is thick stuff, and nothing about it is fun. It's about dusty warehouses, and historical trading details. Metal is cold, and statistics about storage do not a fantasy team make. But a Policy Geek is always curious, and these issues directly affect the economies of the whole planet. Mostly importantly, it has a tight connection to this We Are The 99% thing.

The 3rd, and hopefully final installment, pulls back the curtain, so we can pay attention to the Gold Men Standing behind it. For the third installment: see Heavy Meddle Coming Soon

The Policy Geek