Persistent queues in metals delivery have frustrated many buyers not just because of high prices but because of long wait for delivery and some industry titans, fearing price-pumping tactics in copper, are drafting plans that are questioning the reputation of the London Metals Exchange (LME) just when this exchange is looking for a buyer.
Ever since the big banks bought up metals storage facilities, critics say, price of certain metals has gone through the roof although the supply of it is plentiful.
Aluminum, for example, is in a “chronic oversupply” yet the price has been buoyant and such price fears have migrated over to copper where Glencore is the major player in the storage space.
How does this work?
The basic strategy is to artificially constrain supply by inducing long queues which will crank up premiums for metal’s immediate delivery so that by cutting private non-LME deals with miners to sell their stuff these finance houses can rake in huge profits.
Suppose you bought 1,000 tons of metal, say aluminum, at the London Metals Exchange (LME) at the going price that day and, according to the LME rules, the delivery is suppose to be done out of one of LMEs affiliate warehouses most of them owned by Glencore or, in case of aluminum, the largest one by Goldman Sachs in Detroit.
Those affiliate warehouses will trickle out only 2,000 tons per day so that given the amount of purchasers the wait in Detroit can be up to 7 months. Meanwhile, warehouses are charging somewhere at $0.45 per ton per day to hold your aluminum that they won’t deliver plus any additional profits out of using your metal as collateral for loans.
Since frustrated buyers will go outside the LME framework to buy their metal, the cost of immediate delivery would go at a premium. By cutting special deals with miners, these finance houses that cause the artificial metals shortage, now supply the metal at an immediate delivery pocketing the hefty fee.
For example, Glencore recently moved one of its warehouses into a remote and inaccessible place, a move that will induce a shortage and a spike in premiums, while on the other hand it cut an aluminum deal with Rusal that will “secure sales at near record high premiums over spot prices this year, a Rusal executive said on Thursday.”
What’s scarring many is that these price-pumping tactics are now spreading to copper, a widely used input metal in production.
One way to deal with the queues is to delist some of the warehouses and LME has recently delisted one of Glencore’s warehouses from its network citing potential problems in copper deliveries.
But delisting everybody or even some warehouses that are systemically important, although possible is not a solution either.
While all of this is legal, some “copper market heavyweights are drafting proposals to stop metal from getting stuck in queues leaving storage facilities, as such delays would threaten the credibility of the London Metal Exchange’s (LME) flagship product, industry sources said,” reports Reuters.
So metals price-pumping model is no longer affecting just the price but the LME credibility, and this comes at the most inopportune time because LME is up for sale.
For an exchange that made only $7.7 million in profit, being settled by widespread legal “rigging” may leave little nasty taste for the new owner.