Hundreds of millions of times a day, thirsty people open a can of cola, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd manoeuvre by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers? aluminium. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process ?a merry-go-round of metal?.
Goldman bought Metro International Trade Services, one of the country?s biggest storers of the metal. More than a quarter of the supply of aluminium available on the market is kept in the company?s Detroit-area warehouses.
Metro International holds nearly 1.5 million tonnes of aluminium in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tonnes of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, according to the interviews. Instead, it is shuttled from one warehouse to another.
Because Metro International charges rent each day for the stored metal, the long queues caused by shifting aluminium among its facilities means larger profits for Goldman. And because storage cost is a major component of the ?premium? added to the price of all aluminium sold on the spot market, the delays mean higher prices for nearly everyone, even though most of the metal never passes through one of Goldman?s warehouses.
Aluminium industry analysts say that the lengthy delays at Metro International since Goldman took over are a major reason the premium on all aluminium sold in the spot market has doubled since 2010.
?It?s a totally artificial cost,? said one of them, Jorge Vazquez, managing director at Harbor Aluminium Intelligence, a commodities consulting firm. ?It?s a drag on the economy. Everyone pays for it.?
By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest ? or even insider trading. But in the commodities market, it is perfectly legal.
After Goldman bought the company in 2010, Metro International began to attract a stockpile. It actually began paying a hefty incentive to traders who stored their aluminium in the warehouses. As the hoard of aluminium grew ? from 50,000 tonnes in 2008 to 850,000 in 2010 to nearly 1.5 million currently ? so did the wait times to retrieve metal and the premium added to the base price. By the summer of 2011, the price spikes prompted Coca-Cola to complain to the industry overseer, the London Metal Exchange, that Metro?s delays were to blame.
Industry analysts and company insiders say that the vast majority of the aluminium being moved around Metro?s warehouses is owned not by manufacturers or wholesalers, but by banks, hedge funds and traders. They buy caches of aluminium in financing deals. Once those deals end and their metal makes it through the queue, the owners can choose to renew them, a process known as rewarranting.
Metro officials declined to discuss specifics about its lease renewals or incentive policies.
But metal analysts, like Vazquez at Harbor Aluminium Intelligence, estimate that 90% or more of the metal moved at Metro each day goes to another warehouse to play the same game. That figure was confirmed by current and former employees familiar with Metro?s books, who spoke on condition of anonymity because of company policy.
Nick Madden, chief procurement officer for one of the US? largest aluminium purchasers, Novelis, said the situation illustrated the perils of allowing industries to regulate themselves. Madden said that the exchange had for years tolerated delays and high premiums, so its new proposals, while encouraging, were still a long way from solving the problem. ?We?re relieved that the LME is finally taking an action that ultimately will help the market and normalise,? he said. ?However, we?re going to take another year of inflated premiums and supply chain risk.?
