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(ZEROHEDGE BLOG) Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly

Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly
Tyler Durden's picture
Submitted by Tyler Durden on 06/16/2011 23:57 -0400

About a month ago we reported on an inquiry launched into JPM's "anti-competitive" and "monopolistic" practices on the LME which have resulted in artificially high prices for a series of commodities which had been hoarded by the Too Big To Fail bank. Today, the WSJ continues this investigation into a practice that is not insular to JPM but also includes Goldman Sachs and "other owners of large metals warehouses" which can simplistically be characterized as a De Beers-like attempt to artificially keep prices high for commodities such as aluminum, courtesy of warehousing massive excess supply, artificially low market distribution of the final product, while collecting exorbitant rents in the process. Specifically, "Goldman, through its Metro International Trade Services unit, owns the biggest warehouse complex in the LME system, a series of 19 buildings in Detroit that house about a quarter of the aluminum stored in LME facilities.

It is not only Goldman's Metro operations, but includes JP Morgan's Henry Bath division, and naturally commodities behemoth Glencore, all of which are taking advantage of the LME's guidelines and rules which make the imposition of a pseudo-monopoly an easy task. The primary driver of this anti-competitive behavior is the fact that GS, JPM and Glencore now control virtually the entire inventory bottlenecking pathways:

"In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street.

The LME has licensed about 600 warehouses around the world. The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage."

And since the outcome of this anti-competitive delayed tolling collusion ends up having quite an inflationary impact on end prices, the respective administrations are more than happy to turn a blind eye to this market dominant behavior which buffers the impact of deflation on input costs. We may have seen the end of the OPEC cartel. Alas, it has been replaced with a far more vicious one - this one having Goldman Sachs and JP Morgan as its two key members.

WSJ explains further:

The
warehousing issue alarmed one trader enough to seek government
intervention. Anthony Lipmann, managing director of metals trader
Lipmann Walton & Co. Ltd., gave evidence to the U.K. House of
Commons Select Committee in May 2011, raising concern about large banks
and trading houses owning facilities that store other people's metal.

The
U.K.'s Office of Fair Trading dismissed concerns that ownership of
warehouses gives certain market players an unfair advantage, saying on
Tuesday that there were no "obvious competition issues that would merit
further investigation at this stage."

Goldman's Detroit warehouse holds about 1.15 million tons out of a total 4.62 million tons in LME-approved warehouses.

Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months.

Metro
charges its customers 42 cents a day for storing one metric ton of
aluminum in Detroit, which is about the industry average. At 900,000
tons in the warehouses, Goldman is earning $378,000 a day on rental
costs, or about $79 million in seven months.

"Warehouses are
making a lot more money," said Jorge Vazquez, managing director of
aluminum at Harbor Commodity Research. Goldman is "really the winner
clearly, because if you want to take metal away from the location, you
have to wait up to 10 months to get your metal out, and in the meantime
you're paying rent."

While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high. But unlike De Beers, Goldman also gets to charge rental fees once demand delivery instructions are sent out. The rent ends up being substantial due to the firm's unwillingness to release handily available product to the market in due course:

Metro, meantime, is taking in metal.
Metro also offers cash incentives to producers like Rio Tinto Alcan to
store their metal in Metro's sheds for contracted periods, sometimes as
much as $150 a ton, according to traders.

Once the metal is in
the warehouse, the producers sell ownership to this metal on the open
market. The new owner can't collect his metal for seven months because
of the bottleneck. For that period, the new owner is stuck paying rent
to Metro.

"The system is set up like a funnel, so you can dump
large amounts of metal in the front end and only get a little out at the
back end," said David Wilson, director of metals research at Société
Générale SA. "It enables a situation where the rules of the warehousing
system are taken advantage of."

Another beneficiary of this monopoly behavior of course are the actual metal producers, which benefit from this illegal and conflicted "middleman" intervention:

Aside
from warehouses, producers of the metal are benefiting, because they
are able to charge more for their metal. Klaus Kleinfeld, chief
executive of Alcoa Inc., said in an interview that supply-and-demand
factors are leading prices higher.

Yet it is not even Goldman or JPM's fault: after all they are merely following the guidelines set up by the LME:

"You can't blame the warehouses," Mr. Kleinfeld said.

U.S.
aluminum sheet maker Novelis sent a letter to the LME in May
"expressing concerns" about the warehousing situation, a company
spokesman said.

The complaints led the LME to commission an
independent study into the issue last July. That study recommended a
sliding scale be adopted, rather than the fixed minimum of 1,500 tons a
day. That would result in larger warehouse complexes being required to
release more metal.

It effectively doubles the minimum amount
required to be relinquished by Metro each day. The ruling would go into
effect in April. The LME board on Thursday, however, failed to reach a
consensus on the recommendations.

While warehousing used to be a last resort market at inception, it has now become, courtesy of the economies of scale of the middlemen, the "go-to" market, which makes any normal market clearing impossible.

Because should true market clearing be allowed, the prices for everything from aluminum to copper would plunge immediately:

The
situation is made more aggravating for metal consumers because supply
has far outweighed demand for most of the last decade, and there is more
than 4.5 million metric tons of surplus metal stored in LME's warehouse
system.

Alas as pointed out previously, with the
exchanges ultimately merely conforming to the bidding of their host
ponzi scheme governments, which will happily allow even further
consolidation of warehousing facilities by the trio in order to
artificially boost inflation ever higher, the final product is a vicious
loop in which everyone benefits...Everyone but the end consumer of
course, who is faced with an anti-competitive system controlled by a
handful of Fed-funded players.

And with China unlikely to open up
sales of its own warehouses (especially since Chinese vendors are now
well-known to use physical copper in storage to write letters of credit
against for speculative purposes) to the market, the system will
persevere until such time as global inflationary powers are finally
destroyed and there is a scramble to dump inventories. Like what
happened in the fall of 2008. At that point just as the status quo
drives prices higher, so the unwind will result in a massive undershoot
of prices from fair values. Which in turn will allow those insatiable
importers of commoditized product such as China to feel like your
typical mortgage-free living American at a K-mart blue light special.
But of course we don't have to worry about that, because the central
planners will never allow the system to implode like it did in 2008.
After all that would defeat the whole purpose of central planning...

In the meantime, good luck to anyone who wishes to break the cartel's monopoly in the aluminum, copper or any other commodity.

Labels: COMMODITIES, DEBEERS, GOLDMAN SACHS, LONDON METAL EXCHANGE, MONOPOLIES

posted by MrK @ 7:00 AM