FOCUS - A deep dive inside the Glencore/Pacorini zinc lawsuit

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

London 10/06/2016 - A New York judge has granted a request by several galvanisers to move forward with their lawsuit against Glencore Ltd and its warehousing subsidiary, Pacorini Metals USA, which are accused of monopolising the market for Special High Grade (SHG) zinc premiums.

Duncan Galvanizing Corp along with four other zinc consumers allege that the two defendants engaged in various anti-competitive acts that increased the load-out queues at New Orleans warehouses registered with the London Metal Exchange. This in turn had the "foreseeable and intended" effect of artificially inflating the Midwest zinc SHG premium, they claim.

In March 2015, US District Judge Katherine Forrest dismissed Goldman Sachs and JPMorgan from the case, ruling that the galvanisers failed to state a plausible anticompetitive conspiracy. But she did allow Duncan to amend its case against Glencore and Pacorini.

"[The Second Amended Complaint filed on February 11] tells a plausible story of market control leading to increased price. While there may be infirmities in particular individual parts of the story, the totality is what matters and the totality passes muster," Judge Forrest ruled on Monday.

"They allege that defendants had an actual ability to control the price of SHG zinc in the United States through their ability to control the MW SHG premium, and they support this claim with a number of plausible factual allegations," the judge added.

THE ALLEGATIONS

The complaint alleges that defendants engaged in various forms of anticompetitive conduct including acquiring control over the supply of LME US zinc, "manipulating zinc warehouse supplies", "manipulating LME rules", "resisting LME reforms", making "illicit incentive arrangements" and "engaging in shadow warehousing".

Duncan's lawyers argued that LME warehouse stocks are intended as a "market of last resort" to be used in times of extreme shortage but, during the warehouse wars of the last seven years, LME warehouses became a "market of first resort" - essentially an alternative physical market. This led LME zinc stocks to back up "like a funnel" in New Orleans around when Glencore bought Pacorini in 2010.

"Just prior to Glencore's acquisition of Pacorini, 'extraordinary volumes' of zinc were delivered to New Orleans warehouses, which market participants believed to be coming from Glencore affiliates located in Spain, immediately coinciding with a 25-percent rise in the MW SHG Premium," according to court documents. 

"Within one week of Glencore's announcement that it would acquire Pacorini, warrants for more than 50,000 tonnes of zinc in New Orleans warehouses were canceled in a single day, which some traders connected to the acquisition," the documents added.

Glencore/Pacorini during the period in question controlled 27 LME-listed warehouses in New Orleans. At one point, Pacorini stored as much as 90 percent of all LME warehouse stocks of zinc.

The galvanisers also allege that defendants took various other actions since 2010 to increase LME warehouse queues, which in turn boosted SHG zinc premiums, including engaging in a "scheme to create falsified bills of lading to make it appear (presumably to the LME) that more metal was shipped out of its warehouses than was actually the case". For more on this specific issue, click here.

Glencore/Pacorini also provided financial incentives to metal producers and traders to store zinc in their warehouses, allowing defendants to amass greater stockpiles of zinc. At times, these incentives exceeded the price premium that producers could obtain by selling on the open market, the suit claims.

Other alleged queue boosting strategies include "shadow warehousing", whereby Pacorini facilitated the flow of metal from LME-registered warehouses to off-exchange locations and the strategic delisting of warehouses, both of which increased opacity in the market, the lawsuit said.

"These practices manipulated zinc prices by disrupting market perceptions as to the availability of metals," the documents said.

THE DEFENCE

In a separate filing to dismiss the charges, Glencore/Pacorini contend that the amended complaint does not adequately allege facts showing that defendants have monopoly power in the LME US zinc market and also fails to prove that the relevant product and geographic markets that have been monopolised.

And even if they were involved in conduct that had the effect of raising the MW SHG premium and/or other zinc premiums, Glencore/Pacorini say they could not unilaterally set the price at which SHG zinc is sold in the US or exclude competition from other traders or warehouse operators.

During oral arguments, Glencore's lawyers claimed the ability to bid up the price for SHG zinc does not mean that they exert monopoly power.

A HIGH BAR

Judge Forrest, meanwhile, acknowledged that Duncan and the other galvanisers are presenting exceptionally complex arguments so the burden of proof will be high if the case makes it to trial.

"Certain [Glencore/Pacorini defence] arguments have curb appeal," wrote Judge Forrest. "In particular, the theory of monopoly power involves an intricate and unorthodox conception of price manipulation that differentiates this case from traditional [anticompetitive] claims."

"The plaintiffs' allegations regarding the relevant product and geographic market are, furthermore, fairly sparse and may or may not ultimately prove consistent with the actual operation of the physical zinc market. There are, moreover, aspects of plaintiffs' theory that may run into issues at later stages of this case. These are questions for another day," Forrest said in her order.

Discovery will start immediately. The parties have been directed to confer on a schedule for the remainder of this case, including fact and expert discovery, briefing on class certification, final motions for summary judgment, and trial, the court ordered.

(Editing by Mark Shaw) 



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