Speculators constraining metals supply

Financial speculators in metals are buying out storage warehouses, loading them up with the metal and are, deliberate or not, constraining the supply of the commodity they trade.

In February 2010, Goldman Sachs bought out warehouse and logistics company Metro International Trade; Commodity trader Trafigura purchased NEMS in March 2010; in September 2010 world’s largest commodity trader, Glencore, bought out Pacorini.

The only major warehousing and logistics firm that is independent and is registered with the London Metals Exchange (LME) is C. Steinweg in Rotterdam.

Out of 642 LME listed warehouses, C. Steinweg’s has 159 or about 25% implying that commodity speculators control nearly 75% of the metals storage market.

So why are speculators, with no interest in the metal other then its price, in warehouse business?

Hard to guess on the speculative intent but one effect has been inflated price in metals like aluminum and zinc despite overabundance of the metal.

For example, at the Metro warehouse in Detroit, Goldman Sachs has stored 1,132,875 tons of aluminum of which 203,075 tons is set for physical delivery to real aluminum users but it takes 135 days for the delivery to be completed because the warehouse sips out only 1,500 tons per day.

Some question whether LME can be considered the market of last resort if it facilitates massive inflow but minimal outflow that makes users wait months to get the metal.

The delivery delay then creates an arbitrage between the LME and the actual physical market.

Goldman says it has done nothing wrong.

Then there are bank financing deals, and Goldman is a bank.

From Reuters:

Also pushing aluminum costs higher are bank financing deals, which are estimated to have locked up about 70 percent of the 4.4 million tonnes of the metal sitting in LME-registered warehouses around the world. ME inventories hit an all-time record above 4.7 million tonnes in May.

In a typical deal, a bank buys aluminum from a producer, agrees to sell it at some future point at a profit, and strikes a warehouse deal to store it cheaply for an extended time period.

Metals analyst at Credit Agricole in London, Robin Bhar, wants US and UK regulators to examine. “This is an anti-competitive situation… And I think the regulators have to look at it.”