(Corrects to differentiate between pending changes to the LME benchmark aluminium contract and the exchange's proposed aluminium premium contracts)
Winter Park, Florida 23/12/2014 - Goldman Sachs has completed the sale of its warehouse company Metro International Trade services to a subsidiary of Reuben Brothers, a Swiss private equity firm. Terms of the transaction were not disclosed.
Goldman has since May been actively marketing its warehouse subsidiary, which it bought for about a half a billion dollars in 2010.
Metro is one of the largest LME-approved warehouse operators, with facilities in the US, Italy, Turkey, South Korea and Malaysia.
Most notably, it is the dominant player in Detroit, where its 30 warehouses hold 906,325 tonnes in cancelled aluminium warrants. The line to remove the lightweight metal from the Motor City still stands at about 640 days.
At the peak of the warehousing boom, Goldman was making between $150 million and $190 million per year from Metro but the value of this asset has eroded significantly over the past year due to increased operational risks and a more restrictive regulatory environment.
Last month, the influential US Senate Permanent Subcommittee on Investigations alleged that Goldman Sachs, via Metro, paid incentives to metal holders to move metal on and off warrant in what is now being called a 'merry-go-round' trade.
US Senator Carl Levin from Michigan said that there was “no doubt” that Goldman intentionally inflated the queues to remove metal from Detroit, which distorted market fundamentals and pricing dynamics.
Simultaneously, the Goldman physical trading desk bought and sold aluminium financial instruments, the prices of which were directly affected by the length of the Detroit queue, Levin said during the November 21 hearing.
“If that's not a recipe for manipulation, then I haven't seen a recipe for manipulation,” Levin said in one of his more pointed comments.
Metro CEO Christopher Wibbelman testified that the formation of queues was not the result of actions by Metro but rather because of the independent decisions by owners of metal to realise relative value compared to other metals.
A MUCH DIFFERENT LANDSCAPE
Major banks are now fleeing the warehousing business en masse amid increased legal, regulatory and media scrutiny and rapidly shrinking margins.
For example, JP Morgan Chase & Co in October completed the sale of parts of its physical commodities business to Mercuria Energy Group. Included in the package was metal warehousing unit Henry Bath & Son Ltd, which has 67 LME-listed warehouses around the world including 42 in Rotterdam.
On the regulatory front, the US Federal Reserve plans to move forward with a rule that would limit banks' ability to own physical commodities such as metals, oil and natural gas.
But there are also plenty of economic reasons that explain exodus of banks from the warehousing sector. Namely, there are new rules on the near-term horizon that will make it even more difficult for operators to book large profits.
First, the LME plans to implement a new linked load-in/load-out (LILO) rule in the first quarter of 2015. Under this rule change, all metal loaded into a warehouse over a three-month period is measured. If there is a queue of more than 50 calendar days, the affected warehouse would be expected to deliver out additional metal based on a formula.
The exchange also aims to launch aluminium premium contracts in the second quarter of next year. To support this new offering, it has proposed a new rule to ensure that warrants delivered against the the premium contracts are readily available and not subject to long wait times should new queues arise.
Perhaps the LME's most controversial idea is to to require warehouses to report on their off-warrant stock movements.
Specifically, if the new rules are approved after the consultation ends on February 9, a load-out will have to be accompanied by a bill of lading detailing means of transport and destination to certify that metal is not being moved to another nearby warehouse owned by the same company.
Other requirements such as the obligation to carry at least once a year a third-party 100-percent stock count - up from a 10-percent count now - have already led to warehouses submitting rent increases of brtween two percent and four percent for the year starting in April 2015.
The proposed rules would especially affect operators with queues, which at this time are mainly Pacorini in Vlissingen and Metro in Detroit.
Meanwhile, several operators have told FastMarkets that they could resort to taking legal action if rent caps on warehouses were introduced as one of the LME’s proposals suggests.
There has also been some talk that the remaining operators could resurrect the International Metals Warehousing Association (IMWA), a now-dormant group that successfully defended warehouses in the past and was responsible for bringing about the consultation periods that are in play now between them and the LME.
ABOUT METRO'S NEW OWNER
Reuben Brothers, which is owned by brothers David and Simon Reuben, invests in mining companies, data centres, racecourses, pub companies, aerodromes, technology and media assets.
In the metals space, the firm sold its bulk iron ore and steel trading divisions, which were formerly known as Metalloyd, as well as its stake of LME-registered warehousing company Erus Metals to the Gerald Group in May.
At the time, Reuben Brothers said it would focus on deploying its capital across a diverse portfolio of commodities and associated value chain, with particular focus on shipping investments, natural resources and private equity and structured financing.
(Additional reporting by Kathleen Retourne and Archie Hunter)