Levin: Firm boosted aluminum costs
Washington — – A Senate committee says Wall Street bank Goldman Sachs manipulated aluminum stockpiles at Metro Detroit warehouses in a practice that likely has added “billions” to the cost of beer cans and cars.
The Senate Permanent Subcommittee on Investigations chaired by Sen. Carl Levin, D-Detroit, spent two years investigating commodity transactions from Wall Street banks Goldman Sachs & Co., JPMorgan Chase & Co. and Morgan Stanley involving aluminum, uranium, copper, coal mines, and oil and natural gas pipelines.
The committee looked in detail at Goldman Sachs’ acquisition of Allen Park-based Metro International Services LLC in 2010 for $450 million — a company that had about 10 warehouses in Metro Detroit to store hundreds of thousands of tons of aluminum. Major users of aluminum like Coca-Cola, MillerCoors and Novelis say delays caused by long queues to transfer aluminum are causing market distortions, and premiums to store aluminum “are at least double their normal levels.”
In essence, the committee said by using cancellations of major orders and transfers of aluminum, Metro International was able collect more in rent because of long delays in getting the aluminum out of warehouses. In May, the time it took to move metal hit 674 days — up from 100 days in early 2012.
“Since being acquired by Goldman, Metro’s practices have likely added billions of dollars in costs to a wide range of aluminum users, from beer makers to car manufacturers to defense companies that make warships for the Navy,” said the 400-page report released Wednesday. “It is past time for the Federal Reserve and other regulators ... to adopt and enforce needed safeguards on this high-risk physical commodity activity.”
Goldman Sachs said its practices at Metro “did not impact the cost that Americans pay for cans of beer.”
The report said that allowing banks to get involved in business ends a tradition of separating both. It said the practice allows “potentially abusive conduct, including significant financial loss, catastrophic event risks, unfair trading, market manipulation, credit distortions, unfair business competition and conflicts of interest.”
Levin said banks’ holdings of huge stocks of commodities poses huge risks to the economy. Levin believes banks shouldn’t own pipelines, oil and aluminum — and that regulators or Congress should bar the practice.
“We simply cannot allow the wealthy, powerful Wall Street banks the power to influence the price of a commodity essential to our economy — especially when that bank is trading a financial product related to that commodity,” Levin told reporters. “We need to restore the separation of commerce and banking. We need to bar the use of valuable non-public information in commodities markets, just as we bar the use of non-public information in trading stocks.”
Levin noted that Ford Motor Co. is making its a new F-150 made with an aluminum body. He said he heard an estimate that the banks’ practices could boost the cost of the F-150 by $150. Ford didn’t immediately respond to a request for comment.
MillerCoors told Congress in 2013 that the practices had cost his company “tens of millions of dollars in excess premiums over the last several years.”
Levin didn’t say how much it added to the cost of pop cans or aluminum cars. MillerCoors said the dysfunctional aluminum market had added $3 billion in expenses to users of the metal.
Goldman Sachs defended its practices and said it wasn’t manipulating the market. Delays in moving aluminum in and out of warehouses “were the result of metal owners’ independent, financially motivated decisions to remove metal that had been placed in Metro’s warehouses. Like any other landlord, Metro was merely competing for tenants,” the bank said in a statement.
The report said the company moved aluminum around thousands of times between the Metro Detroit warehouses. Goldman Sachs said it was done at the request of customers.
Goldman Sachs offered “freight incentives” to convince aluminum owners to store their stockpiles in Metro Detroit warehouses. “The unprecedented warehouse queues that were developed at Metro Detroit’s warehouses forced metal owners to wait months, a year or at one point nearly two years to get their metal out of storage,” the report said, meaning Metro International earned more in rent since some owners couldn’t get their aluminum out.
Metro would pay an owner to cancel its warrants on aluminum held at the warehouses and get in line to exit, where it would be loaded from one warehouse to another. The report found a big reason for the long lines were cancellations of orders by a small group of financial institutions including Deutsche Bank and Red Kite, a London-based hedge fund.
Levin said Metro International in April began complying with a new rule from the London Metal Exchange — which oversees aluminum trading — to make it easier for owners to get their aluminum out faster.
The committee will hold a hearing Thursday that includes Christopher Wibbelman, president and CEO of Metro International, and Jacques Gabillon, head of global commodities at Goldman Sachs. On Friday, the committee will hear from Dan Tarullo, a member of the Federal Reserve Board and acting enforcement director at the Federal Energy Regulatory Commission.
At one point in 2012, Goldman Sachs owned 1.5 million metric tons of aluminum worth $3.2 billion — about one-quarter of the annual U.S. production — through its Metro International unit. Metro as of this year still controls more than 85 percent of the U.S. aluminum storage market. It went from about 10 warehouses in Metro Detroit in 2010 to nearly 30 today.
Goldman’s defense of its practices released Wednesday said there is no of shortage of aluminum, and prices have fallen substantially since 2008. “There has been a consistent surplus of aluminum since 2008, resulting in a large volume that has been placed in storage,” Goldman said. “Each year approximately 49-50 million tons of aluminum are produced. Since 2008, production has exceeded consumption by one to two million tons a year, resulting in an increasing surplus that has gone into storage and substantially lower prices to the consumer, down as much as 40 percent.”
Goldman also said Metro does not benefit from longer queues. “Metro receives rental payments for all metal that remains in its warehouses regardless of whether or not a queue exists,” the bank said, adding the lines “did not impact the ability of end-users or consumers to obtain aluminum.”
Under the financial rules governing banks, Goldman Sachs says it must sell Metro International within 10 years of buying it. Goldman said Wednesday it is “actively involved in a sales process” for the company.