(Reposting to coincide with opening of US markets)
Winter Park, Florida 20/11/2014 - The build-up of aluminium stocks in Detroit warehouses has been a key market driver for several years but figuring out who owns all that metal has proven an elusive task.
As part of a two-year investigation, the influential US Senate Permanent Subcommittee on Investigations believes that Goldman Sachs, via its warehousing subsidiary, Metro International Trade Services, paid incentives to Deutsche Bank, Glencore and UK hedge fund Red Kite to move metal on and off warrant in what is now being called a merry-go-round trade.
In February 2010, Goldman acquired Metro for about $450 million. During the first summer under its new owners, Metro board of directors, composed exclusively of Goldman employees, became concerned that owners of aluminium in its warehouses were removing the metal from its warehouses and storing it elsewhere, leading to a loss of revenue, the report said.
In an effort to curb that loss, the board made a strategic decision to market incentives to metal owners that already had metal stored in Metro’s warehouses.
Prior to that point, the company merely offered 'freight incentives' to entice aluminium owners to move metal into its Detroit warehouses, which was a long-held and common practice.
Ultimately, the Senate Subcommittee claims, Metro's efforts led to at least six deals with three customers: Deutsche Bank, Red Kite, and Glencore.
“Although each deal involved millions of dollars, none was formalized in a signed contract. Instead, details were spelled out in an unsigned contract, emails, and invoices,” the report said.
In each deal, Metro provided financial incentives to the owner of the aluminium stored in its warehouses to: (1) wait in the queue; (2) upon reaching the head of the queue, load out its metal from a Metro warehouse; (3) deliver the metal to another nearby Metro warehouse; and (4) warrant the metal while in the second Metro warehouse.
“The net impact for Metro was that, each day in which the front of the queue was occupied by a metal owner executing a merry-go-round deal, its warehouses lost virtually no metal. At the same time, the merry-go-round deals made money for Metro, not only by preventing the loss of metal, but also by helping to lengthen the Detroit queue, extending the period during which other metal owners had to pay rent to Metro,” the report said.
METRO AND DEUTSCHE BANK
The first of these deals was transacted in September 2010, with DB Energy Trading, a subsidiary of Deutsche Bank. It involved 100,000 tonnes of aluminium, most of which was loaded out of one Metro warehouse and immediately loaded into another, the Subcommittee alleges.
“The transaction was not suggested by Deutsche Bank, but by Metro personnel, and reviewed and approved by Metro senior executives and the Metro Board of Directors’ Commercial Decisions Subcommittee, composed exclusively of Goldman employees,” the report added.
According to Deutsche Bank, the 100,000 tonnes was held for its own account as a cash-and-carry trade. Consistent with its general practice, Deutsche Bank entered into negotiations with Metro’s agent seeking discounted rent.
Metro declined to provide the discounted rent directly but did suggest that Deutsche Bank cancel the warrants stored in the LME-approved warehouses, wait in the queue to load out the metal, transport the aluminium to other Metro warehouses and after a period of less expensive or free rent, re-warrant the metal.
According to the unsigned contract, Deutsche Bank was responsible for paying $42.95 per tonne in costs to move the metal from one Metro warehouse to another. But the contract also contained a provision in which Metro committed to pay the bank the same amount, $42.95, for every tonne of metal that was subsequently re-warranted and stored at a Metro warehouse.
“The effect was to offset Deutsche Bank’s costs so long as its aluminium was re-warranted and stored in another Metro warehouse, essentially enabling Deutsche Bank to move its metal to the new location for free. In addition, according to Deutsche Bank, Metro then provided the bank with discounts equal to roughly 15 cents per tonne per day for the period from September 15, 2010 to February 16, 2011,” the report said.
Finally, the agreement imposed a substantial penalty on Deutsche Bank if it elected to do anything other than reload the aluminium into a new Metro Detroit warehouse and re-warrant it.
“The agreement provided that, if Deutsche Bank sold the metal to a third party at any point during the five months covered by the deal, it would have to pay Metro a fee of $65 per tonne, or about $6.5 million for 100,000 tonnes of aluminium,” the report said.
“The agreement essentially provided Deutsche Bank with the rent discount it had sought, but instead of applying the discount in a straightforward manner to the aluminum already stored in a Metro warehouse - a discount permissible under LME rules - Metro required Deutsche Bank to cancel its warrants, join the queue, leave the warehouse, and move its metal to a new Metro warehouse,” it added.
It was this single action that kicked off the Detroit warehousing boom, the Senate investigators said.
On September 15, 2010, there was a short queue in Detroit of about 20 days. One week later, on September 22, 2010, a few days after Deutsche Bank cancelled the warrants, Metro had a queue of nearly 120 days.
“The presence of that nearly 120-day queue meant that any metal owner that cancelled warrants after September 22, 2010, would not only have to wait behind Deutsche Bank for their metal to be loaded out of the warehouse, but would also have to pay rent to Metro while waiting,” the report said.
Metro also conducted four merry-go-round deals with Red Kite in 2012 that involved a total of nearly 440,000 tonnes of aluminum. Approximately 410,000 tonnes were loaded out of Metro warehouses and right back into other Metro warehouses, the report said.
In February 2013, Metro entered into the sixth and final merry-go-round deal with Swiss trader Glencore. That transaction involved loading out about 91,400 tonnes of aluminum from Metro warehouses in Detroit, only to load the same amount into other Metro sheds, the report said.
In a statement, Goldman responded that the formation of warehouse queues was "the result of metal owners’ independent, financially motivated decisions to remove metal that had been placed in Metro’s warehouses. Like any other landlord, Metro was merely competing for tenants.”