EU’s Commission’s Enterprise and Industry has begun its inquiry into the big bank commodity trading houses who also warehouse the metal they trade but if the results of this inquiry is passed on to the European Commission’s Competition it would signal that big bank trading houses like Goldman  will be examined as cartels, price-fixers and monopolists.

From Reuters:

A bigger worry for producers and for LME warehouse owners such as banks and trading houses – who profit from metals backlogs – is the possibility that the inquiry is passed on to the European Commission’s Competition directorate.

The directorate looks at cartels, price-fixing, market-sharing and monopoly behaviour. It has investigative powers, and can impose fines of as much as 10 percent of global revenues on companies found in breach of EU competition law.

“I’d expect the competition authorities to be looking at this as the subject has been raised with them,” says McHale, president of the Federation of Aluminium Consumers in Europe (FACE).

The current inquiry has no legal, regulatory or legislative authority but can only pass its recommendation. Notable is that the inquiry was launched after metals users complained that the wait to get physical metal from warehouses is over a year.

Big bank trading houses like Goldman, Glencore, Trafigura and JPMorgan, own well over half of the metals warehousing supply and let out only a small amount of metal out of them causing long wait time for the end user who has to pay rental fees to these warehouses for waiting.

As a result, there are huge inventories of metals like aluminum and zinc but prices for them keep going higher because ever more metal is being tied up in the warehouses.

“For a trader or banker to own a warehouse for logistics purposes is fine, but for them to own an LME approved warehouse is not the same thing. It’s an interference in a free market,” said Anthony Lipmann, managing director of minor metals trader Lipmann Walton & Co.

The European Commission is aid to have started a preliminary investigation of huge surcharges, premiums and long queues for metals sold by the London Metal Exchange (LME) warehouses that are mostly owned by big trading firms.

“The EC is carrying out a preliminary investigation in an attempt to throw light on the queues at LME warehouses. The EC wants to throw light on the malfunction in these markets in order to help metals consumers,” a one unnamed source with direct knowledge of the matter was quoted by Reuters.

LME says that all of the problems associated with getting the metal has nothing to do with deliberate creation of artificial supply reductions but with financing deals.

End users of metals typically buy directly from a metals producer but if they need extra than they have to get it through the LME approved warehouse. These are often located in remote places and the amount of metal they load out is extremely small so that a wait can be longer than a year. For those who want the metal sooner, a premium above the LME price is imposed by the metals trading house which, in most cases, is also an owner of the warehouse that has caused the wait.

“Yes, we believe they are looking at it,” a second metals industry  source said of the EC move. “The situation as it stands cannot continue. It’s getting worse. Sure you can get metal, but you’re going to have to pay.”

Warehousing space is controlled by 4 large warehouses (see chart). Pacoroni is owned by Glencore, Metro by Goldman Sachs, Henry Bath by JP Morgan and the independently owned Steinweg is getting a huge competition from Trafigura who bought Nems whose business is booming.

Pacorini makes $150 million a year in rental charges just from the aluminum backlog while the Glecore unit makes way more by charging a steep premium for those whom they deny the metal from their warehouse.

“These times of crisis are golden times for us,” Pacorini managing director Simon Yntema said.

Goldman Sachs’ Metro charges $0.45 per ton per day for the contracted metal that they cannot deliver which amounts to $166 per ton daily plus $36 in handling charge… and there are 625,200 tons of aluminum that is awaiting delivery from Metro.

LME is currently conducting a review of the load out problems.

“For a trader or banker to own a warehouse for logistics purposes is fine, but for them to own an LME approved warehouse is not the same thing. It’s an interference in a free market,” said Anthony Lipmann, managing director of minor metals trader Lipmann Walton & Co.

“Last time I was visiting an aluminum plant, I was warned to never tell workers whose families are starving what happens to all the metal they produce, that it sits in storage for years, in order to feed the appetite of capitalists,” said the top level banking source. “I’m not joking, it would cause social unrest.”

Chinese government is expected to soon start a stockpiling program of buying excess metal such s copper, sources close to government are being cited.

“The NDRC is going to do it soon,” said a source with links to China’s state planner, the National Development and Reform Commission (NDRC), who has direct knowledge of the plan says Reuters.

About 165,000 tons of copper could be bought and 400,000 tons of aluminum these sources say.

The buying scheme is seen as a floor on the prices of these metals.

“(The NDRC) are not going to pay top dollar but they may help provide a floor for prices. It’s more likely to support the copper price than the aluminum price, because comparing the size of the industries, for aluminum it’s a drop in the ocean but for the copper market it’s a touch tighter,” Stephen Briggs, a BNP Paribas analyst based in London, says.

The smelters in China were complaining that the slowdown this year was worse than in 2008 and were pleading to government to buy the stuff.

“I think the buying would happen in November. It should not be later than Dec. 15 because after that time smelters won’t be able to put the sales into this year’s earnings,” says a source.

The scheme is already approved from a 2008 stimulus but was never fully executed.

Speculators maybe outcompeting the actual physical users of industrial metals like aluminum and zinc as their dominance in the premium markets have cranked the delivery price of the metal to the record highs.

For example, the premium physical users of aluminum have to pay to the warehouse where the metal is stored exploded from $121 per ton over the spot price quoted at the London Metal Exchange (LME) to about $210 for the third quarter (Q3) delivery.

Recently, however, Japanese aluminum buyers were told that there will be no negotiations on the base price for the Q4, a signal which means that those who possess the metal are confident that the premium in aluminum will go even higher.

Situation with the zinc is similar. August premium on zinc was about $40 but now they are about $120 per ton.

“Premiums perhaps reflect the difficulty in sourcing readily available units given long exit queues at other locations in the region such as Johor. I don’t think demand has turned a corner,” said Standard Bank analyst Leon Westgate.

With no demand uptick, the long queues physical users are forced to endure due to “sourcing” means that the metal is already tied up by the speculators.

“Warehouses and their owners – like JP Morgan , Glencore and Goldman Sachs – have stepped up raids on each other’s stocks, resulting in large movements of metal that are not explained by fundamental factors,” notes Reuters.

One way that these “raids” between finance houses and banks are manifested is through large scale warrant cancellations which reduce available metal for delivery.

“We doubt the recent surge in canceled LME zinc warrants has anything to do with physical demand; more likely, it represents a shuffling of the deck of inventory held in financing deals,” BNP Paribas said in a note in early July.

Having outsized amounts of metal in a warehouse also helps constrain the supply. For example, Goldman Sachs’ aluminum warehouse in Detroit has huge available supplies but only a small amount of it is allowed to trickle. Zinc is similar. LME data shows one player, unofficially believed to be Glencore, controls between 50-80% of global LME stock.

The “competition for metal units with investors wishing to earn a low-risk, highmargin return on financing stock” is bashing the physical users and the “scale of this new source of demand for aluminium is simply massive,” says Andy Home, a metals analyst.

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.

Aluminum price (yellow line) went up in price even though supply of the metal (blue) line rose as well.

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.

London Metals Exchange (LME) is considered the seller of last resort of things metal, like copper and zinc, yet as of late it has been under fire because its treader-dealers have been creating delivery queues, be that in copper, aluminum or zinc so recently the LME has barred top trading firm Glencore from delivering copper from one of its European ports fearing that Glencore will use its market muscle to push the copper, already seen as tight on supply, way higher in price simply by creating delivery queues at its warehouses.

Well, Glencore has retaliated for the LME snub over copper not at the copper market but in zinc, where Glencore controls 60% of the global trade.

“Commodity trader Glencore is tightening its grip on the global zinc market by moving material to inaccessible locations, forcing industrial users to pay high physical premiums for a metal that is in surplus,” reports Reuters.

In other words, Glencore sells lots of metal but if it is made inaccessible then those who want it will have to pay a premium to get it because it is, as one brutal Scarface character says before chopping up the victim - “I hes de stoff bot is clos bi u now”.

Zinc is, judging by the chart above, in a global supply glut, meaning there is too much of it yet the price hasn’t been reflecting the glut so now we have Glencore and its market controlling power that will jack up the price.

“Premiums – the amount paid over the LME cash price for physical metal – are currently at around $130-135 a tonne for zinc in Rotterdam. By contrast, premiums for copper [another manipulated metal], a metal in deficit which trades at four times the price of zinc, are only at around $70-80 a tonne,” reports Reuters.

“Glencore has always controlled zinc in Europe. They don’t want a surplus there, they want higher premiums, so they’re shipping all the surplus from Asturiana de Zinc (in Spain) to New Orleans, where no one wants it,” Reuters London-based source says.

Will the LME blink?

It is important to watch because LME has warehouses in the US owned by Glencore and Goldman Sachs where artificial cues are also created and if the higher-price posse takes over the LME it casts doubt as to whether they are a real marketplace.