After Wall Street Banks exit controversial aluminum trade, prices return to normal

For the last five years, every beer guzzler in America paid a tiny surcharge to some of the nation’s largest banks. According to manufacturers, practices at warehouses owned by Goldman Sachs and other financial institutions inflated the price of aluminum used in beer cans and thousands of other goods, costing consumers as much as $3 billion a year, as one MillerCoors executive estimated.

Now, drinkers can belch a sigh of relief. Aluminum markups are falling as quickly as they once rose.

By the end of 2014, Goldman and JPMorgan Chase & Co. had exited the warehouse business, as the London Metal Exchange (LME), which sets benchmark aluminum prices, pursued reforms.

With new rules in effect since February and banks out of the business, aluminum surcharges have plummeted. The Midwest premium -- a central component of aluminum pricing that reflects the cost of storage and shipping -- has fallen 58 percent from its February peak, says Morningstar metals analyst Andrew Lane. The overall price manufacturers pay for aluminum has dipped to roughly $2,085 per metric ton from $2,327 at the start of the year.

“They’ve close to round-tripped it,” says Lloyd O’Carroll, an analyst at Northcoast Research.

Analysts point to two factors for the surprising plunge in the Midwest premium from its unusually high peak: new policies at metals warehouses and the winding down of speculation on aluminum by commodities traders.

Industry players who cried foul over bank practices feel vindicated. “The recent market activity lends credence to our case,” says Garrett Wotkyns, an attorney for flashlight maker Mag Instrument and other purchasers. His clients have accused Goldman, JPMorgan and European commodities dealer Glencore PLC of a price-fixing conspiracy.

Banks dispute the allegations. Lawyers for Goldman and JPMorgan have pointed out that “all-in” aluminum prices -- the base price of the metal plus the additional Midwest premium -- fell over the period in question, and that there was no factual basis for price-fixing claims.

In response to queries, a Goldman representative pointed to a white paper that argued that prices paid by purchasers reflect supply-and-demand fundamentals. Queues in warehouses “do not impact the ‘all-in price’ consumers pay for delivered physical aluminum,” the white paper says.

Lawyers for Goldman and JPMorgan have argued that the banks simply were acting in their own best interest. They acquired warehouses during a time when aluminum storage was especially lucrative and pushed to maximize their market share. With demand for aluminum now rising, that window has closed.

“The banks would argue that they took advantage of an arbitrage opportunity,” says Lane, who estimates that banks saw an overall 7 percent return on aluminum positions.

“There was really no upshot for anyone else other than the banks involved.”