For the last five years, every beer guzzler in America paid a tiny surcharge to some of the nation’s largest banks. According to manufacturers, practices at warehouses owned by Goldman Sachs and other financial institutions inflated the price of aluminum used in beer cans and thousands of other goods, costing consumers as much as $3 billion a year, as one MillerCoors executive estimated.
Now, drinkers can belch a sigh of relief. Aluminum markups are falling as quickly as they once rose.
When prices were still climbing in 2013, searing investigations into the aluminum trade by the Huffington Post and the New York Times led to lawsuits, regulatory inquiries and a lengthy Senate report. The lenders had helped create a system in which forklifts shuffled aluminum back and forth between warehouses, driving up prices.
By the end of 2014, Goldman and JPMorgan Chase & Co. had exited the warehouse business, as the London Metal Exchange (LME), which sets benchmark aluminum prices, pursued reforms.
With new rules in effect since February and banks out of the business, aluminum surcharges have plummeted. The Midwest premium -- a central component of aluminum pricing that reflects the cost of storage and shipping -- has fallen 58 percent from its February peak, says Morningstar metals analyst Andrew Lane.
The overall price manufacturers pay for aluminum has dipped to roughly $2,085 per metric ton from $2,327 at the start of the year.
“They’ve close to round-tripped it,” says Lloyd O’Carroll, an analyst at Northcoast Research.
Analysts point to two factors for the surprising plunge in the Midwest premium from its unusually high peak: new policies at metals warehouses and the winding down of speculation on aluminum by commodities traders.
“Aluminum was used as an investment vehicle,” says Lane. “That created some artificial demand that drove up premiums.”
Industry players who cried foul over bank practices feel vindicated. “The recent market activity lends credence to our case,” says Garrett Wotkyns, an attorney for flashlight maker Mag Instrument and other purchasers. His clients have accused Goldman, JPMorgan and European commodities dealer Glencore PLC of a price-fixing conspiracy.
Banks dispute the allegations. Lawyers for Goldman and JPMorgan have pointed out that “all-in” aluminum prices -- the base price of the metal plus the additional Midwest premium -- fell over the period in question, and that there was no factual basis for price-fixing claims.
In response to queries, a Goldman representative pointed to a white paper that argued that prices paid by purchasers reflect supply-and-demand fundamentals. Queues in warehouses “do not impact the ‘all-in price’ consumers pay for delivered physical aluminum,” the white paper says.
A Merry-Go-Round Of Metal
After the financial crisis, major U.S. banks moved heavily into commodities trading. In 2010, Goldman Sachs bought Metro International Trade Services, a Detroit warehousing company that in 2014 stored 85 percent of the LME-traded aluminum in the U.S.
It was a strategic acquisition. The recession had produced a glut of cheap aluminum, creating market conditions that essentially guaranteed profits for any firm that could pay to stockpile aluminum and sell it on the futures market for high prices.
O’Carroll says commodities dealers leaped at the opportunity. “There were a lot of cutthroat battles among traders," he says, as stockpiles of aluminum exploded. In Detroit, LME aluminum hoards grew from 52,000 metric tons in 2008 to 1.5 million metric tons in 2014.
Per LME rules, Goldman did not own any of the aluminum itself. But the lender put itself in the very center of aluminum trade, inking deals with other players that incentivized them to store with Metro. Purchasers complained that the inducements “lure[d] metal away from the physical market” and led to “distortions” in the aluminum markets.
Goldman argued that the incentives had little effect on premiums, which continued to rise even after the bank says Metro stopped paying incentives in November 2013. Other traders ultimately placed and canceled orders at Metro facilities, not Goldman.
Still, financial regulators took notice, issuing subpoenas to companies that traded financial products based on the price of aluminum even as they stored vast amounts of the metal.
Complaints from manufacturers soared as wait times for delivery stretched to months and premiums edged up. Queues in Detroit lengthened from around 40 days when Goldman bought Metro to a peak of more than 600 days, helping drive the Midwest premium up more than 300 percent.
Goldman’s trading activities and business arrangements helped inflate the queues, according to a 2014 Senate subcommittee report. As the Times exposé revealed, aluminum would leave one Metro warehouse only to be shuttled to a different Metro warehouse. Metro clients were paid to pull their supply from a queue at one facility and join a queue at another, keeping both rents and wait times high. A former delivery worker called it a “merry-go-round of metal.”
In 2011, an independent consultant recommended that the LME require warehouses to ship out more aluminum on a daily basis than they take in. But LME members were resistant. In 2013, Goldman told federal regulators that warehouse owners were incentivized to “maximize inventory” by shipping aluminum out at the slowest rate possible.
Because the LME was jointly owned by its members, committees that shaped LME policy included the very banks profiting from the delays. Goldman and JPMorgan together owned more than one-fifth of the exchange before it was sold to a Hong Kong company in December 2012.
A Return To Normal
After a lengthy legal scrum with Russian aluminum giant Rusal, which benefited from the logjams, the exchange has finally acted on the 2011 recommendation to make warehouses push more aluminum out the door every day than they take in.
The effect on aluminum premiums has been dramatic. “The decline has happened much more quickly than we anticipated,” says Lane.
Some observers have puzzled over exactly how the maneuvers benefited financial firms. U.S. District Judge Katherine Forrest dismissed some of the antitrust lawsuits filed against the banks by major aluminum purchasers. Though the court agreed that trading practices inflated aluminum premiums, the strategies didn’t rise to the level of a price-fixing conspiracy.
“Frankly put, the economics of the alleged conspiracy as pled do not work,” Forrest wrote in a dismissal. Other lawsuits are ongoing.
Lawyers for Goldman and JPMorgan have argued that the banks simply were acting in their own best interest. They acquired warehouses during a time when aluminum storage was especially lucrative and pushed to maximize their market share. With demand for aluminum now rising, that window has closed.
“The banks would argue that they took advantage of an arbitrage opportunity,” says Lane, who estimates that banks saw an overall 7 percent return on aluminum positions.
“There was really no upshot for anyone else other than the banks involved.”