Will shuffling aluminum ingots between warehouses increase commodity prices ?

An article in the New York Times (July 21, 2013) claims that commodity traders, who have purchased large stocks of aluminum ingots, but are required to ship out from warehouses at a rate of 3,000 tons. But these traders are claimed to own several warehouses in Detroit and ship between these warehouses while maintaining their hold on inventories, thus reducing the amount available quickly and, given storage charges permitted, increasing the price by 0.1 cent per aluminum can or $5 billion over three years. The article claims that delays in shipment, and thus storage chargers, have increased from 1.5 months to 16 months. What metrics should the London Metals Exchange be required to impose to prevent such price changes due to delays ? Should the premiums that are charged for all aluminum sold on the spot market be permitted to be based on delays in Detroit even if the metal does not pass through those warehouses, as is the case currently ?

1 Response to Will shuffling aluminum ingots between warehouses increase commodity prices ?

Larry Herman says:

July 31, 2013 at 3:25 am

Yours is the first article/posting that I’ve come across even somewhat questioning of the conclusions and assertions in the article. It was sent to me originally by someone who rather breathlessly claimed that this was a perfect example of his world view that the world was now being run by powerful who manipulate markets and governments to their benefit and to the detriment of the rest of us. I then saw references to the article and its obvious conclusions throughout the media and finally a sarcastic presentation on the Daily Show. Must be horrible, I thought. Until I read the entire article (I wonder how many others have done so?). I’m a Ph.D. economist, although I know little about finance, commodity markets, and exchanges. I’m no ideologue, distrusting market power and government about equally. Still, as I read the article, I became more and more confused. The quality of the description and analysis was below what I would have expected from a good undergraduate. At the very least, a large number of conclusions remained to be fully explained. My manure detector was triggered. Perhaps Goldman Sachs is manipulating aluminum storage to their advantage and perhaps the SEC is wrong to permit investment banks to intervene directly in commodity markets, but this article did not convince me of that. More than anything, I cannot figure out why I have not read a single critical article. What am I missing? Here are a few of my questions and concerns:
1. Why does this logistics and storage market exist at all? Why don’t large users purchase directly from producers or brokers?
2. Surely large users would not tolerate such delays (even prior to GS’s involvement) and storage-based price increases and long ago would have stockpiled aluminum themselves. Why didn’t/haven’t they?
3. Metro Int’l is storing 1.5 million tons. I believe that the U.S. production is only slightly greater. Is that possible that on firm stockpiles the entire value of annual U.S. production.
4. 3,000 tons are required to be shipped out daily at a minimum (why?). That’s only 0.2% of stockpile. This is very small, both in terms of any rational explanation of the logic of the service from anyone’s perspective and in terms of likely market effects on prices.
5. I admit to not knowing how the spot price for aluminum works, but I don’t see has such small movements can possible affect the spot price appreciably. The article implies that the doubly of the price of aluminum since 2010 is largely due to this manipulation. I assume that most readers also don’t understand this and need clarity.
6. I really object to the clever linking of this putative manipulation and the claim (refuted by numerous professionals and respected analysts) that speculators fueled increases in oil prices that led to a $10 per fill up price increase in gasoline. This is less good journalism than political rant.
7. Here’s my simple math (which I might have wrong). $2 is the additional cost for 35 pounds of aluminum from this manipulation that putatively doubled the price of aluminum. That translates into a pre-manipulation price of about $114/ton. Metro is offering an incentive to customers of $230 per ton. Daily storage costs are 48 cents/ton which is $175 annually. If these figures are coherent then something is truly wrong. But surely someone can explain them to me.
8. Here’s a quote that I have difficulty accepting: “the warehouse delays add to manufacturers’ costs, because they increase the premium that is added to the price of all aluminum sold on the open market”. Perhaps it’s true, but I cannot understand why this would be the case in an “open” and competitive market, which I believe exists.
9. Even if only 3,000 tons of aluminum is moved around per day, that would be about 75 40-ton trucks. Not what is described in the article. In any case, surely the 1.5 million tons involves greater movements than this, as I noted above. Somehow, the author’s description of a sleepy and very inefficient operation where workers are searching around for specific lots of ingots and then waiting for forklifts and operators (in short supply in depressed Detroit!!!!) are rounded up is bizarre.
As you can tell, I really know nothing about the market. I accept without proof that commodity markets are idiosyncratic and that traders and bankers will do everything in there power to squeeze out profits. What I cannot accept is such a poor explanation of something that may be true and about which the public and our government protectors should be concerned. And I cannot understand how this got published in the NYT, why it’s been picked up and repeated as being clear evidence of the evils of GS and the banks, and why no one with knowledge of the market has not questioned the things that I have questioned and more. Have I lost my mojo?