Shuffle of stored aluminum benefits banks, not consumers
The strategy increases aluminum pricing and is just one way Wall Street is capitalizing on loosened federal regulations to sway a variety of commodities markets, a New York Times probe found.
The New York Times
MOUNT CLEMENS, Mich. — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where Goldman stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses.
Goldman has choreographed this dance to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal.
It also increases prices paid by manufacturers and consumers across the country.
Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process “a merry-go-round of metal.”
Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
The inflated aluminum pricing is just one way Wall Street is capitalizing on loosened federal regulations to sway commodities markets, according to financial records, regulatory documents and interviews with people involved in the activities.
The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks while consumers pay more.
Wall Street’s ownership of warehouses, pipelines and other commodity-related assets will be the focus of a hearing Tuesday by a Senate Banking, Housing & Urban Affairs subcommittee. Commodity warehousing is also being reviewed by the Commodity Futures Trading Commission.
In the case of aluminum, Goldman bought Metro International Trade Services, one of the country’s biggest traders of the metal. More than a quarter of the supply of aluminum available on the market is kept in the company’s Detroit-area warehouses.
Before Goldman bought Metro International three years ago, warehouse customers used to wait an average six weeks for their purchases to be located, retrieved and delivered to factories. But now the wait has grown more than 20-fold — to more than 16 months, industry records show.
Longer waits might be written off as aggravating, but they make aluminum more costly nearly everywhere in the country because of the arcane formula used to determine the metal’s cost on the spot market.
Goldman Sachs says it complies with all industry standards and there is no suggestion these activities violate any laws. Metro International, which declined to comment, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal.
But interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.
“It’s a totally artificial cost,” said Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm. “It’s a drag on the economy. Everyone pays for it.”