Goldman uses Artificial Aluminum Bottleneck to Squeeze Coca-Cola

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Sunday June 19, 2011 · 5:49 PM PDT

2011/06/19 · 17:49

Coca-Cola has accused aluminum warehouse operators Goldman Sachs and JP Morgan of squeezing end users by restricting the amount of metal which is released for consumption, forcing owners to wait up to ten months and pay exorbitant rent to access their own inventory.

Goldman Sachs Group Inc. and other owners of large metals warehouses are being scrutinized by the London Metal Exchange after being accused by users like Coca-Cola Co. of restricting the amount of metal they release to customers, inflating prices.
The board of the LME met on Thursday to discuss complaints from aluminum users and market traders, who say operators of warehouses, which also include J.P. Morgan Chase & Co. and Glencore International PLC, should be forced to allow the metal out more quickly to meet demand.

Aluminum prices have jumped 13% since the start of 2010 even though economic growth had been tapering off. Aluminum for delivery in three months on Thursday closed at $2,557 a metric ton on the LME, down 1.3% on the day.

Despite the fact that Goldman's Detroit warehouse stores over 1 million tons of aluminum, it only allows 1,500 tons to be removed each day.

Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly. Warehouses, meantime, collect rent and other fees.
"The situation has been organized artificially to drive premiums up," said Dave Smith, Atlanta-based Coca-Cola's strategic procurement manager. "It takes two weeks to put aluminum in, and six months to get it out."

Goldman is raking in $378,000 per day on rental costs, which are imposed on customers for months even after they have requested to have their metal removed.

The main focus of the ire among LME traders is Detroit, where there are 235,825 tonnes of aluminium waiting to be distributed out. That means waiting more than six months for your aluminium after holding an LME contract to delivery.
Crucially, you must keep on paying rent on the metal even after you have asked for it to be delivered, giving warehouse companies a guaranteed income stream. For example, the warehouse owner at Detroit – Goldman Sachs – is making revenues of at least $200 per tonne of metal it stores, according to a calculation by Deutsche Bank, because at the current load-out rate it would take about three years to unload all the metal.

That means that the warehouse is able to bid for metal to be delivered into it – even as consumers are waiting in a long queue to get it out. This has had the effect of driving the cost of metal in the physical market in the US to the highest level in more than a decade relative to LME prices.

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Goldman uses Artificial Aluminum Bottleneck to Squeeze Coca-Cola

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