GOLDMAN SACHS´S ALUMINUM PILE / THE NEW YORK TIMES EDITORIAL

July 26, 2013

Goldman Sachs’s Aluminum Pile

By THE EDITORIAL BOARD

History is filled with examples of financial speculators who tried to make big profits by hoarding commodities like gold, silver and copper. Now, some big users of aluminum, including Coca-Cola and MillerCoors, say that the practices of large financial institutions like Goldman Sachs have driven up the price of that important metal.

      

Unlike investors in the past that bought up the commodities they were trying to control, Goldman is not buying the world’s aluminum. Rather, it is storing the metal for other banks, traders and aluminum producers in a complex of warehouses outside Detroit that it acquired in 2010. The problem, as described in The Times by David Kocieniewski, is that since the bank entered this business, the time it takes buyers to get the metal from those warehouses has shot up to more than 16 months, from 6 weeks. Goldman has attributed the delays to a shortage of trucks and forklift drivers.

 

But Goldman also pays incentives to owners of the metal to keep it in the bank’s warehouses.

Those delays have bolstered Goldman’s profits, because the bank earns more rent the longer metal stays in its warehouses.

However, companies that use aluminum argue that the delays hurt them by making them wait for deliveries and can also raise the spot price of aluminum because that price is calculated by a formula that includes a premium based on storage costs. An official at MillerCoors told a Senate committee that the difficulty in getting metal supplies had cost it and other companies $3 billion last year.

      

Goldman Sachs says that its warehouses follow the rules of the London Metal Exchange, a commodity market that regulates the operation of a network of aluminum warehouses around the world. The bank also says that any company needing aluminum can buy the metal elsewhere, including directly from producers like Alcoa.

      

Since the rules of the London Metal Exchange require warehouse operators to move out only a small amount of aluminum every day, warehouse operators like Goldman, which until recently owned the Metal Exchange along with other big banks, could hold on to the metal at the expense of businesses that need aluminum.

      

The Metal Exchange has proposed changes in its rules that would force warehouses to reduce their delays, but those modifications would not go into effect until next year. The Commodity Futures Trading Commission has also begun looking into the warehouse operations.

      

In recent years, big banks like Goldman Sachs, Morgan Stanley and JPMorgan Chase have aggressively pushed into the commodity business by buying up warehouses, oil refineries, power plants and other physical infrastructure. They have been able to do so because American lawmakers and regulators have removed many of the barriers that historically separated banking and commerce.

 

(On Friday, JPMorgan said it was exploring selling or spinning out its physical commodity business.)

Banks and their supporters say they should be in the commodity business because it is closely related to their trading activities. But that is also a cause for concern because banks might be able to take unfair advantage of their access to important information in the physical market to benefit themselves when they trade commodities in financial markets.

      

Policy makers must thoroughly investigate the aluminum warehousing strategies to determine whether Goldman and other warehouse operators distorted prices. They should also take a fresh look at whether banks should really be in the business of owning warehouses and other physical infrastructure. Bankers like to emphasize the benefits of such activities, but their involvement also entails risks for the market.