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Will Aluminum Storage Backfire on Banks?


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Within a week, a second major lawsuit has been filed related to the hoarding of aluminum and the artificial rise in the metal’s price. The Goldman Sachs Group, Inc. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Switzerland-based Glencore Xstrata plc along with The London Metal Exchange (LME) – a subsidiary of Hong Kong Exchanges and Clearing Limited – were the accused companies.

The class-action lawsuit has been filed in the U.S. District Court in the Northern District of Florida. The main plaintiffs were Tallahassee, Florida-based aluminum user Master Screens Inc. and an individual, Daniel Price Bart.

The plaintiffs imputed the above-mentioned companies for indulging in anti-competitive and monopolistic actions in the warehousing business. The suit also accused these companies of hoarding aluminum at warehouses in the Detroit region in order to take advantage of inflating prices. Further, the lawsuit alleged that warehouse owners artificially increased waiting times to facilitate lease payment and raise metal prices.

Last week, a lawsuit with similar charges was filed against Goldman and LME in the U.S. District Court for the Eastern District of Michigan by Michigan-based aluminum extrusion company, Superior Extrusion Inc. The suit accused Goldman and LME of hoarding approximately 1.5 million tons of aluminum at warehouses in Detroit in order to take advantage of inflating prices.

These lawsuits come amid the Commodities Futures and Trading Commission initiating an inquiry on the role of banks in the metals warehousing operation. Notably, in July, the Federal Reserve stated that it was reviewing its 2003 decision of allowing banks to pursue trading in the physical commodity market.

Moreover, rising aluminum prices have hit various industries, including the beverage sector. Customers have to pay more for canned drinks each time the cost of the metal creeps up. Molson Coors Brewing Company (TAP - Analyst Report) said that the inflated price of the metal was costing consumers around $3 billion annually.

Further, in the wake of heightened regulatory and political scrutiny of banks’ ownership in the physical commodity business, JPMorgan announced its plan to exit such operations last month. JPMorgan follows Morgan Stanley (MS - Analyst Report) and Goldman, which have been trying to sell their physical commodity business for more than a year now.

Regulators are concerned about the risks arising from banks' ownership of warehouses and plants. They believe that banks' holdings of these assets tend to concentrate market power and increase bank profits, consequently adversely affecting consumers.

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