Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly
About a month ago we reported on an inquiry launched into
JPM's "anti-competitive" and "monopolistic" practices on the LME which
have resulted in artificially high prices for a series of commodities
which had been hoarded by the Too Big To Fail bank. Today, the WSJ
continues this investigation into a practice that is not insular to JPM
but also includes Goldman Sachs and "other owners of large metals
warehouses" which can simplistically be characterized as a De Beers-like
attempt to artificially keep prices high for commodities such as
aluminum, courtesy of warehousing massive excess supply, artificially
low market distribution of the final product, while collecting
exorbitant rents in the process. Specifically, "Goldman, through its
Metro International Trade Services unit, owns the
biggest warehouse complex in the LME system, a series of 19 buildings in
Detroit that house about a quarter of the aluminum stored in LME
facilities. Coca-Cola and other consumers say that Metro in particular
the minimum amount of aluminum allowed by the LME—1,500 metric tons a
day—to leave its facilities, and that Metro could remove much more,
erasing supply bottlenecks and lowering premiums for physical delivery
in the process. Coca-Cola, which has complained to the LME, says it can
take months to
get the metal the company needs, even though warehouses are allowing
aluminum to come in much more quickly. Warehouses, meantime, collect
rent and other fees." It is not only Goldman's Metro operations, but
includes JP Morgan's Henry Bath division, and naturally commodities
behemoth Glencore, all of which are taking advantage of the LME's
guidelines and rules which make the imposition of a pseudo-monopoly an
easy task. The primary driver of this anti-competitive behavior is the
fact that GS, JPM and Glencore now control virtually the entire
inventory bottlenecking pathways: "In recent years, major investment
banks like Goldman and J.P. Morgan and
commodities houses like Glencore have been snapping up warehouses
around the world, turning the industry from a disperse grouping of
independent operators into another arm of Wall Street. The LME has
licensed about 600 warehouses around the world. The transformation has raised questions about whether the investment
banks, which also have big commodity-trading arms, are able to use their
position as owners of warehouses to manipulate prices to their
advantage."And since the outcome of this anti-competitive delayed
tolling collusion ends up having quite an inflationary impact on end
prices, the respective administrations are more than happy to turn a
blind eye to this market dominant behavior which buffers the impact of
deflation on input costs. We may have seen the end of the OPEC cartel.
Alas, it has been replaced with a far more vicious one - this one having
Goldman Sachs and JP Morgan as its two key members.
WSJ explains further:
warehousing issue alarmed one trader enough to seek government
intervention. Anthony Lipmann, managing director of metals trader
Lipmann Walton & Co. Ltd., gave evidence to the U.K. House of
Commons Select Committee in May 2011, raising concern about large banks
and trading houses owning facilities that store other people's metal.
U.K.'s Office of Fair Trading dismissed concerns that ownership of
warehouses gives certain market players an unfair advantage, saying on
Tuesday that there were no "obvious competition issues that would merit
further investigation at this stage."
Goldman's Detroit warehouse holds about 1.15 million tons out of a total 4.62 million tons in LME-approved warehouses.
Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months.
charges its customers 42 cents a day for storing one metric ton of
aluminum in Detroit, which is about the industry average. At 900,000
tons in the warehouses, Goldman is earning $378,000 a day on rental
costs, or about $79 million in seven months.
making a lot more money," said Jorge Vazquez, managing director of
aluminum at Harbor Commodity Research. Goldman is "really the winner
clearly, because if you want to take metal away from the location, you
have to wait up to 10 months to get your metal out, and in the meantime
you're paying rent."
While the obvious purpose of
"warehousing" is nothing short of artificially bottlenecking primary
supply, these same warehouses have no problem with acquiring all the
product created by primary producers in real time, and not releasing it
into general circulation: once again, a tactic used by De Beers for
decades to keep the price of diamonds artificially high. But unlike De
Beers, Goldman also gets to charge rental fees once demand delivery
instructions are sent out. The rent ends up being substantial due to the
firm's unwillingness to release handily available product to the market
in due course:
Metro, meantime, is taking in metal.
Metro also offers cash incentives to producers like Rio Tinto Alcan to
store their metal in Metro's sheds for contracted periods, sometimes as
much as $150 a ton, according to traders.
Once the metal is in
the warehouse, the producers sell ownership to this metal on the open
market. The new owner can't collect his metal for seven months because
of the bottleneck. For that period, the new owner is stuck paying rent
"The system is set up like a funnel, so you can dump
large amounts of metal in the front end and only get a little out at the
back end," said David Wilson, director of metals research at Société
Générale SA. "It enables a situation where the rules of the warehousing
system are taken advantage of."
of this monopoly behavior of course are the actual metal producers,
which benefit from this illegal and conflicted "middleman" intervention:
from warehouses, producers of the metal are benefiting, because they
are able to charge more for their metal. Klaus Kleinfeld, chief
executive of Alcoa Inc., said in an interview that supply-and-demand
factors are leading prices higher.
Yet it is not even Goldman or JPM's fault: after all they are merely following the guidelines set up by the LME:
"You can't blame the warehouses," Mr. Kleinfeld said.
aluminum sheet maker Novelis sent a letter to the LME in May
"expressing concerns" about the warehousing situation, a company
The complaints led the LME to commission an
independent study into the issue last July. That study recommended a
sliding scale be adopted, rather than the fixed minimum of 1,500 tons a
day. That would result in larger warehouse complexes being required to
release more metal.
It effectively doubles the minimum amount
required to be relinquished by Metro each day. The ruling would go into
effect in April. The LME board on Thursday, however, failed to reach a
consensus on the recommendations.
used to be a last resort market at inception, it has now become,
courtesy of the economies of scale of the middlemen, the "go-to" market,
which makes any normal market clearing impossible.
Because should true market clearing be allowed, the prices for everything from aluminum to copper would plunge immediately:
situation is made more aggravating for metal consumers because supply
has far outweighed demand for most of the last decade, and there is more
than 4.5 million metric tons of surplus metal stored in LME's warehouse
Alas as pointed out previously, with the
exchanges ultimately merely conforming to the bidding of their host
ponzi scheme governments, which will happily allow even further
consolidation of warehousing facilities by the trio in order to
artificially boost inflation ever higher, the final product is a vicious
loop in which everyone benefits...Everyone but the end consumer of
course, who is faced with an anti-competitive system controlled by a
handful of Fed-funded players.
And with China unlikely to open up
sales of its own warehouses (especially since Chinese vendors are now
well-known to use physical copper in storage to write letters of credit
against for speculative purposes) to the market, the system will
persevere until such time as global inflationary powers are finally
destroyed and there is a scramble to dump inventories. Like what
happened in the fall of 2008. At that point just as the status quo
drives prices higher, so the unwind will result in a massive undershoot
of prices from fair values. Which in turn will allow those insatiable
importers of commoditized product such as China to feel like your
typical mortgage-free living American at a K-mart blue light special.
But of course we don't have to worry about that, because the central
planners will never allow the system to implode like it did in 2008.
After all that would defeat the whole purpose of central planning...
In the meantime, good luck to anyone who wishes to break the cartel's monopoly in the aluminum, copper or any other commodity.