Goldman research rebuts warehouse critics

Analysts at Goldman Sachs have argued that warehouse queues do not influence aluminium prices, rebutting complaints by users of the metal who have suggested the opposite.

Long queues to take delivery of aluminium from London Metal Exchange warehouses have become the focus of a furious debate in recent months, triggering a series of complaints by metal users, criticism by senators and investigations by US regulators.

Goldman, which owns one of the largest warehousing companies on the LME, has been named as a defendant in a number of class action lawsuits alleging its warehousing activities have pushed up aluminium prices. The bank has said the suits are meritless.

Goldman’s analysts argued the queues had driven a dislocation between the price of LME futures and physical aluminium, but had not affected the overall cost. “The development of LME queues has not affected the total “physical” price for aluminium,” they wrote.

Since the financial crisis, warehouses have accumulated towering stocks of industrial metals. But the quantity of metal that warehouses must deliver each day is limited by LME rules, creating bottlenecks and delivery delays at some warehouses of a year or more. These queues have helped to drive up physical premiums – the cost of metal over and above the LME benchmark – to record levels.

Goldman’s research comes as the LME is poised to announce its response to the criticism of its warehousing system – a move that is likely to define the trading and pricing of aluminium for years to come and could have a dramatic effect on the profitability of warehouse companies. The Federal Reserve is also reviewing the extent to which banks are permitted to trade physical commodities and own commodity infrastructure.

Goldman’s analysts led by Jeffrey Currie, head of commodities research, found that the overall physical price of aluminium – that is, the LME futures price plus the so-called “physical premium” – was consistent with the predictions of a model based on fundamental and macroeconomic factors such as inventories, production costs and manufacturing growth.

“In other words, the functioning of the physical market for aluminium and its forward curve does not appear to have been significantly affected by the formation of long queues,” they said.

In addition, they argued that a change in rules proposed by the LME “could have significant direct costs in the proper functioning of the exchange”, increasing price volatility and reducing transparency. The proposal has drawn furious reactions from aluminium producers Alcoa and Rusal.

In a statement, Goldman stressed that its research was produced independently of the bank’s other interests.