The London Metal Exchange (LME) is considering taking action against companies accused of causing price hikes by storing metals, to the relief of UK metals recyclers.
It has been widely reported in the media that the US investment bank Goldman Sachs is embroiled in controversy over stocks of aluminium held in warehouses.
Goldman Sachs, among other companies including JPMorgan Chase & Co and Trafigura, own warehouses and are paid substantial rental fees by trading firms to store their metals.
Although not an illegal practice, it is alleged that bottlenecks in the supply of a metal would artificially raise its price on the LME, which sets the rules for global metals markets.
This in turn could have had a knock-on effect for scrap metal prices, because metal recyclers calculate their prices as a percentage of the LME price for the primary metal. This is done in a effort to hedge sales prices for finished goods against movements on the LME.
LME has launched a consultation on the current length of warehouse storage times. It has proposed changing its rules so that warehouses deliver more metal than they take in if their queues are longer than 100 days.
Nick Madden, chief procurement officer for large aluminium recycler Novelis, said the exchange had for years tolerated delays and high premiums. “We’re relieved that the LME is finally taking an action that ultimately will help the market and normalise. However, we’re going to take another year of inflated premiums and supply chain risk,” he added.
Another industry source told MRW: “I don’t see the likelihood of scrap prices crashing any time soon. The point is that unwinding warehouse stocks will help create a truer market where supply and demand have a more immediate effect on LME prices. The market will be more liquid.”
Additionally, the Independent reported the UK’s Financial Conduct Authority was “understood to be looking at the situation” while Reuters said the US Commodity Futures Trading Commission had ordered warehouse companies to preserve communications from the past three years, in what could be a precursor to a formal probe.
Goldman Sachs said in a statement: “The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners. In fact, LME warehouses are actually prohibited from trading all LME products.”