Aluminum Prices Drop Quickly As Goldman And LME Reduce Delivery Times

Michael Teague  |

Aluminum prices in the US have dropped over the last two weeks after a New York Times investigation of Goldman Sachs’s (GS) storage operations presented strong evidence that the investment bank was using its Detroit-area storage facilities to inflate costs and increase profits.

Goldman Sachs currently owns 27 different warehouses in Detroit after it purchased Metro International Trade services back in 2010. Metro’s facilities constituted one of the nation’s largest aluminum storage operations, housing about a quarter of total market supply. The Times found that aluminum delivery times after the Goldman purchase increased from an average of six weeks to 16 months in some cases, as the company moved 1,500-pound bars of aluminum from one warehouse to another sometimes three times each day for no justifiable reason.

But ever since The Times’ decision to publish the results of the investigation was followed by congressional scrutiny, the world’s largest investment bank, while predictably not admitting to the allegations, has promised to step up the pace of its deliveries.

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US prices have dropped almost 23 percent in the ensuing period, as the bank was threatened by a combination of pressure from increased Federal scrutiny led by the Commodities Futures Trading Commission, as well as big aluminum-consuming companies like MillerCoors LLC and Coca-Cola (KO) who expressed their frustration with the scheme before congress last week.

In addition to the increased public scrutiny of the goings-on at Goldman’s Detroit facilities, more pressure came from the aluminum company Superior Extrusion Inc., who filed a suit on August 1 against both Goldman and the London Metal Exchange that sets the rules for much of the global trading of the metal.

While one of Goldman’s initial objections to the allegations was the claim that its warehouses stored only 1.5 million of the 48 million tons of aluminum produced globally, and therefore could not affect higher prices to the extent that was alleged, its recent attempts to reduce delivery times has been felt well outside the United States. The surcharge for aluminum delivery dropped to its lowest rate in almost two years, sliding 7 percent across the Eurozone. It is hard to believe that a clearing up of the bank’s storage and delivery issues could have affected prices so drastically and so far away on only just over 3 percent of global supply.

Furthermore, according to Barclays Plc, aluminum delivery surcharges could sink a further 25 percent by year’s end. While this is all good news for purchasers of aluminum, it is not yet clear what effect it could have on the intervention of big banks into physical commodities markets.

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