Over two years after Zero Hedge first accused Goldman and JPMorgan of becoming monopolists in the commodity warehousing business (see "Goldman, JP Morgan Have Now Become A Commodity Cartel [22]"), and two weeks after the NYT's reminder [23]the world of just this leading to the latest Kangaroo Court congressional hearing [22] on the matter, which may or may not have resulted in JPMorgan announcing it would exit the physical commodities business [24], the long overdue legal fight began this Friday when lead plaintiff Superior Extrusion sued Goldman and London Metal Exchange owner HKEx for engaging in "anticompetitive and monopolistic behaviour in the warehousing market in connection with aluminium prices" and accusing the firms of violating the Sherman anti-trust act. Precisely what Zero Hedge said, some 26 months ago.
From lawsuit 13-cv-13315 filed in US District Court for the Eastern District of Michigan:
In violation of Sections 1 and 2 of the Sherman Antitrust Act (“Sherman Act”) 15 U.S.C §§1 and 2, the Goldman Sachs Defendants (“Goldman”), the London Metal Exchange Defendants (“LME”) and other Defendants have, from February 1, 2010 forward (the “Class Period”), combined, conspired or agreed with one another and other persons to restrain aluminum supplies in LME Detroit Warehousing and inflate aluminum prices, including the Platts MW Midwest Premium or Midwest Premium or Midwest Transaction premium price. The Midwest Premium or Platts MW Midwest Premium or Midwest Transaction Price or similar terms are hereinafter collectively referred to as “the Midwest Premium or the Platts MW Premium.” This premium is a standard contract benchmark price term for purchasing and selling physical aluminum in Michigan, Ohio, Wisconsin, Indiana, Illinois, Minnesota, contiguous and other areas of the U.S.
The purposes of the antitrust laws have been to reduce prices, increase product, improve efficiency, and improve quality. By restraining supplies and inflating prices, Defendants have violated the first two of these purposes. The means which Defendants have employed to do so, have included agreements to permit or operate in an extremely inefficient manner and to provide extremely low quality of service in the sensitive area of warehousing. Thereby, Defendants’ intentional conduct has been per se unlawful, deleterious to all of the purposes of the antitrust laws, inherently suspect, and grossly unreasonable.
(a) There have been repeated and ongoing public complaints since early 2011 that Defendants were inflating aluminum prices. Despite these complaints, Defendants intentionally continued, in order to profit themselves, to perform their agreements and engage in their conduct to restrain aluminum supplies and inflate aluminum prices. Based upon the repeated public complaints and other information, the Defendants had complete knowledge that they were inflating aluminum prices and injuring persons who paid those prices, especially the Platts MW Premium and Midwest Premium price.
(b) In performing their agreements and carrying out the unlawful conduct, Defendants have fully known of and specifically intended to cause such price inflation and such injuries to persons, like Plaintiff, who have paid the inflated prices.
However, after increasingly intensive recent government scrutiny, Defendants have reversed themselves. Defendants belatedly took steps yesterday (July 31, 2013) to terminate some of the conduct by which Defendants were intentionally restraining aluminum supplies, inflating aluminum prices, and intentionally injuring the persons who paid the inflated aluminum prices. Defendants’ belated steps include steps that Defendants had previously jointly or individually either refused to take or said that they could or should not take.
During the Class Period, the LME has held the sensitive position of controlling (a) exchange-traded aluminum forward or futures contracts in the U.S., and (b) warehousing of exchange-traded aluminum in the U.S. including in the Midwest and the greater Detroit, Michigan area (“LME Detroit Warehousing”). The LME’s monopoly over the trading of aluminum forward or futures contracts in the United States during at least February 1, 2010 until the present (“Class Period”) included capturing approximately 97-99% of the trading in such contracts. The LME has approved and made agreements with the LME certified warehouse owners who held, due to the unlawful conduct alleged herein, a growing portion of the aluminum stored in the United States. This is estimated to be 50% or more of all such aluminum in warehouse storage in the U.S. and a significantly greater percentage of all the aluminum in those parts of the U.S. that purchase and sell aluminum on the Midwest Premium or Platts MW Premium.
During the Class Period, Goldman has held the sensitive position of having a monopoly over LME-approved warehousing space for deliveries on LME aluminum and other metals contracts in LME Detroit Warehousing. Goldman purchased, at the start of the Class Period, warehouses with more than 80% of the storage space in the Detroit area. Goldman has continued to own same throughout the Class Period. Goldman’s unlawful conduct alleged herein has leveraged that monopoly into a position in which Goldman, by itself, stores approximately well over 50% of the aluminum stored in warehouses located in those parts of the U.S. that transact based on the Midwest Premium or Platts MW Premium.
(a) Through an interconnected series of agreements in unreasonable restraint of trade, Goldman and the LME restrained approximately 1.5 million tons of aluminum in LME Detroit Warehousing.
(b) This constitutes more than 75% of the LME aluminum in storage in the United States. It is estimated to constitute more than 50% of the total aluminum in warehouse storage in the United States. As a result of the large amount of aluminum in storage in Goldman’s LME Detroit Warehousing and Defendants unlawful agreements, it reportedly took in June 2013 as long as sixteen months for a customer to receive their aluminum from the time they order such aluminum to be loaded out of the Detroit warehouse until the time of actual delivery.
(c) Having inefficiently and unreasonably imposed the deadweight loss on the economy of greatly prolonged durations of storage of aluminum and great increases in unnecessary storage bills, Defendants further agreed to charge far above the market rate for such storage.
(d) Defendants have generated hundreds of millions of dollars per year in storage revenues during their regime of artificially high storage rates and grossly inefficient and artificially long delays in loading out aluminum. These extraordinary revenues from inefficiencies and deadweight restraints on the economy, are reflections of Defendants’ extreme monopoly pricing power and abusive agreements in very unreasonable restraint of trade.
Subsidized and incentivized by their supra-competitive storage revenues from their foregoing “get paid more to do less” inefficiency agreements, Goldman --- with the knowledge, consent and agreement (and to the profit) of the LME --- also has leveraged its agreements with the LME as follows. Goldman has made a series of second level agreements in unreasonable restraint of trade. In this second level of agreements, Goldman has overbid other market participants and further inflated aluminum prices as a means to attract and divert additional aluminum in the Midwest U.S. to store in its LME Detroit Warehousing.
Goldman has done so by offering incentives of up to $250 or more per ton to firms to store aluminum in LME Detroit Warehousing for long periods. These incentive payments have directly caused the inflation of aluminum prices as a prior and necessary step in order for Defendants to attract and obtain the aluminum, and then to divert it into the LME Detroit Warehousing. This second level of agreements has further “inextricably intertwined” the injuries that Defendants have intentionally caused through their aluminum price inflation, with Defendants agreement to restrain aluminum supplies.
(a) Defendants’ combinations of their foregoing unreasonable “get paid more to do less” agreements, and Goldman’s overbidding and diversion agreements have reduced aluminum supplies and shifted the supply curve of aluminum available for sale. As a result, there has been substantially less aluminum available for sale in the United States especially in Michigan, Ohio, Indiana, Wisconsin, Illinois, Minnesota, contiguous and other areas. And there has been substantially more aluminum restrained in LME Detroit Warehousing incurring inflated storage rates.
(b) For example, from 2009-2013, the amount of aluminum stored in LME non-Detroit warehouses in the U.S. has declined by 50%. This decrease is less than in sync with and less than an accurate reflection of the amount that should have been reduced in times of economic improvement. The less than normal reduction was due to some mimicry in non-Detroit locations of the Goldman-LME conduct in Detroit. Distorting the U.S. economy further, however, Goldman’s “get paid more to do less” agreements with the LME and Goldman’s “diversion” agreements with others, have caused the amount of aluminum trapped in LME Detroit Warehousing to increase, not decrease, and to increase by more than 60%. This large contra-economic trend increase, has restrained and trapped such a large portion of the available U.S. supplies of aluminum that it has been inflating aluminum prices since 2010.
(c) Consistent with the essential services of warehouses, a large amount of aluminum built up in LME Detroit Warehousing during the 2008-2009 vicious slowdown in the economy. If, during the economic recovery of 2010-2013, such aluminum had not been unreasonably restrained by Defendants’ agreements in unreasonable restraint of trade, then the amounts stored in Detroit would normally have declined from approximately 900,000 to much less than 400,000 tons. Instead, the amount of aluminum in storage has increased from approximately 900,000 tons to well in excess of 1,400,000 tons such that approximately 50% or more of the warehouse stored aluminum in the United States is now stored in the LME Detroit Warehousing (and approximately 75% of the LME aluminum stored in the United States is restrained and stored in Detroit). This directly encouraged others to begin to mimic the Goldman/LME formula which further distorted the U.S. economy.
(d) The U.S. produces approximately 5,500,000 tons of aluminum per year, and net imports 500,000 tons per year. Thus, Defendants have restrained in Detroit three times the annual net imports of aluminum and 27-plus percent of the ENTIRE annual production of aluminum. These extraordinary changes, at the margin, in the available supply of aluminum caused by Defendants, have greatly inflated aluminum prices.
b) In response the complaints about high prices, the LME has stated, per Chris Evans, in New York during January 2013, that purchasers of aluminum supposedly should simply stop paying the high prices. In effect, the LME encouraged users to starve themselves of aluminum (and, impliedly, to lay off workers) so that Goldman and the LME could increase their stockpile of aluminum and their resulting supracompetitive storage revenues.
Contrary to the LME’s classic monopolistic and anticompetitive statements, however, Ford, General Motors, Coca-Cola, Pepsi, Anheuser-Busch, MillerCoors, Novelis and other users of aluminum who have complained about Defendants’ practices do not have to further restrain trade and lay off their workers so that Defendants’ unlawful agreements and abuses of their monopoly powers alleged herein, may continue.
The Defendants agreed to and did abuse their respective monopoly powers over these sensitive, essential areas of commerce. Defendants did so in order to inflate their revenues, profits, and aluminum prices, including the Midwest Premium or Platts MW Premium prices of aluminum.
A quick reminder on just how vertically integrated in the monopoly business Goldman was until recently:
Until the sale of Defendants’ LME Holdings to Hong Kong Exchanges & Clearing Ltd., Goldman was the second largest shareholder of Defendant LME Holdings. Goldman held approximately 1.23 million shares which comprised approximately 9.5% of the shares. The LME had, at that time, an incentive to accommodate Goldman and other large warehouse owners who were large shareholders of the LME and also brought customers to the LME. In fact, JP Morgan was the largest LME shareholder with approximately 1.4 million ordinary shares (approximately 11%) and also owned LME approved warehouses. During the Class Period, JP Morgan owned LME warehouses in Baltimore, Chicago, New Orleans, Liverpool, Hull (Immingham), Bilbao, Trieste, Antwerp, Rotterdam, Singapore, Busan, Gwangyang, and Johor (Pasir Gudang).
Other large shareholders of LME Holdings included Metdist 9.39%, UBS 4.26%, Citigroup 2.32%, Merrill Lynch 2.32% Morgan Stanley 2.32%, Koch Metals 2.32%, and Jeffries Bache 1.93%.
And so on. The full lawsuit can be found at the bottom of this post.
Naturally, the response by the LME's current owner, the HKEx, and of course, Goldman, was swift. From Reuters:
"LME management's initial assessment is that the suit is without merit and LME will contest it vigorously," HKEx said.
The move comes just days after Goldman Sachs bent to mounting political pressure and regulatory scrutiny of its Metro International metals business, by offering customers immediate access to aluminium stored in its warehouses.
"We believe this suit is without merit and we intend to vigorously contest it," a Goldman Sachs spokesman said. "I would also note that aluminium prices are down 40 percent from their peak in 2004," he said;
And up how much since the commodity cartel started rounding up supplies? We really hope Goldman finds a better defense strategy than this.
Finally, all we can add is that this is a lawsuit that should have been filed in the summer of 2011, not now when the cartel has realized the jig is up and is scrambling to cover its tracks. But better late than never.
Full class action lawsuit by Superior Extrusion vs. Goldman et al. Enjoy