The murky yarn about Goldman Sachs' 27 aluminum storage units in Detroit boils down to some very simple dollars and cents. A respectable source informed me this morning that Goldman charges 48 cents a day for each ton of aluminum it stores. As it has presently 1.5 million tons, or a measly 3% of global production, in its warehouses and there are 365 days to a year, by my figuring Goldman's annual revenues purely from storing the aluminum total about $255 million before expenses. And I've got a feeling those drivers in Detroit are not exactly getting paid the old Teamsters wages per hour.
So, I can't exactly understand why the CFTC, Sen. Carl Levin, the New York Times and the Financial Times op-ed page will be able to convince the Federal Reserve that this rather banal storage story amounts to a manipulation of aluminum prices in Goldman Sachs' favor and against the interests of the can manufacturers, beer and soda companies and consumer prices. After all, Goldman presently has under storage 1.5 million tons of aluminum, which happens to be a measly 3% of total world aluminum production in 2012 of some 48 million tons. It would have to be a very sharply formed strategy that turned 3% of world aluminum supply into a price manipulation crime. In fact, the point is Goldman is a very minor player in the aluminum market. Minor as in 3%.
What's more, the users of aluminum are putting it in storage because they don't need it at the moment, as the price of aluminum has fallen by 40%, a rather seriously bearish matter. If they suddenly need the metal they would have to go to the aluminum spot market, say on the LME (London Metals Exchange), and buy it from a major producer. As well, there is a proposal pending for metal depositors to be able to remove 6000 tons of aluminum, double the 3000 tons available for removal each day now. It's fascinating the way alleged manipulation can lead to plans for increasing supply to meet demand.
Yes, there are troubling parts to the story. Goldman admits a percentage of the aluminum is being stored by financial interests like speculators, traders and hedge funds, who have been kicked in the chops by the sharp decline in the value of their aluminum during the general decline in most commodity prices. But, Goldman, protecting itself and its powerful trading clientele, won't reveal how much the traders own versus the industrial interests. It must mean the hedge funds are the biggies.
Nor can I understand why it requires a year's time for those storing their aluminum to have it
delivered to them. Apparently, it's an archaic system whereby a depositor today must enter a queue, which at present rates of delivery, would require more than a year to actually get return delivery of your aluminum. This immense delay just doesn't make any sense to me at all in this modern age of fork-lift trucks and the like. Naturally, it appears to me that the proposal to suddenly make double the amount of aluminum available smacks of rushing to put out the fire before the $255 million in fees totally disappears.
I'm aghast at the scare scenarios postulated by the FT today, first alleging that an accident at a coal mine Goldman took over in the Latin American nation of Colombia mind you, when it became a distressed property, could trigger such a "crisis of confidence" as to endanger one of the too-big-to fail institutions. I guess the FT means Goldman itself. Seems a little excessively alarming to me when we really should be worried about the shortage of collateral backing the fundamental financial underpins of the system as well as the non-transparent bilateral derivatives trades that use an impossible to determine leverage. Even more ridiculous is the FT supposition that dealing in metals and storage can be compared to the cascading avalanche of losses in sub-prime mortgages during 2008.
And shame on the New York Times for making it appear that Goldman Sachs was moving vast amounts of aluminum around Detroit from warehouse to warehouse as a way to keep it off the market and push aluminum prices higher. The truth is less scandalous. As the price of aluminum has been in a bear market the users have decided to move it to non-LME warehouses in order to benefit from lower rents and as well not be subject to LME rules. That bears a bit more investigation.To repeat another crucial factor; GS and its clients are limited to removing no more than 3000 tons of aluminum from the warehouses to supply the market according to the rules and regulations of the London Metals Exchange, according to Goldman Sachs. By the way, just how many trucks does it take to move 3000 tons of aluminum ingots. Think about 3000 tons a day. That's a powerful lot of aluminum. Hopefully we'll get a more precise explanation of these internal mechanicsw of the aluminum storage business when the hearings begin.
