Aluminum Market Facts: A Debate With Goldman Sachs

We continue our game of “Point, Counterpoint” with Goldman Sachs on the LME aluminum warehousing debacle.

(Goldman’s points from a recent news release in italics, with MetalMiner’s commentary following.)

“Approximately 95 percent of the aluminum that is used in manufacturing is sourced from producers and dealers outside of the LME warehouse system.”

MM: True – however, all 95 percent of that aluminum is subject to the LME + MW premium price created by this warehouse distortion. In other words, all metal flowing within the US is subject to the [inflated] Platts MW premium via the current system.

“The LME warehouse companies do not own the metal in their facilities. They merely store it on behalf of the ultimate owners.”

MM: True, and most forget this point, but we can’t help but ask – so what? “Merely storing it” at a historically inflated MW premium price with 19-month lead times equals lots of extra cost in the supply chain. However, Glencore certainly owns vast quantities of metal as well, as they are traders and finance players. Goldman Sachs, and probably Trafigura and JPMorgan, do as well. The warehouse company (e.g. Metro) may not own any metal, but their parent (e.g. Goldman Sachs) does.

“LME warehouses are strictly prohibited from trading all LME products. Trading affiliates of a warehouse operator do not have any information regarding warehouse operations, as such trading is separated by LME-mandated information barriers, the integrity of which is verified through regular independent audits.”

MM: Yawn…irrelevant.

“Delivered aluminum prices are nearly 40 percent lower than they were in 2006. The warehousing system is not driving up the price of aluminum.”

MM: Show us your math! 2013 aluminum prices have dropped by 25+% since 2006. Not sure where/how the “40 percent lower” comes from. And anyway, why is that even relevant? We have an excess of metal in the global marketplace now as compared to 2006 – we would expect lower prices today.

“Certain facilities owned by non-bank holding companies have queues, while certain facilities owned by bank holding companies do not have queues. The queues that exist in various warehouses are a function of market structure and LME rules.”

MM: No argument there.

“At any time, a company can buy aluminum from a producer. In fact, in recent years there has been more production than consumption. The more immediate sourcing of aluminum from the LME system would be a last resort for a corporate end user given that it always takes a certain amount of time to get inventory out of a warehouse.”

MM: Um, slightly misleading. True, a company can buy aluminum from a producer and the reason we see more production than consumption involves the fact that producers have a profitable place to put metal – in customers’ hands and into the LME warehouse system! Also true that secondary producers and consumers use the LME as a system of last resort – basically only traders and other warehouses own the metal in the current system. In the days when the system worked efficiently, you could get metal out of the LME warehouse system in 48 hours. In those days, small- to medium-sized consumers did regularly use the LME as a source of supply.

by Lisa Reisman