Judge tosses aluminium antitrust suit; consumers failed to prove conspiracy

A New York judge on Friday dismissed a class action lawsuit that accused major banks and a trading house of fixing the price of aluminium by ruling that market inefficiencies were the result of rational profit maximization and not illegal collusion.

Aluminium consumers alleged that Goldman Sachs, JPMorgan Chase and Glencore and their warehousing subsidiaries engaged in a horizontal conspiracy to restrain the output of aluminium by working in concert to stockpile aluminium in Detroit warehouses. This in turn delayed load-out rates, increased storage costs and artificially inflated US Midwest premium.

The London Metal Exchange was also named as a defendant in the original suit; however, earlier this week the exchange was declared immune under the Foreign Sovereign Immunities Act (FSIA).

US District Judge Katherine Forrest did agree with the plaintiffs’ assertion that between 2009 and 2012 inefficiencies developed in aluminium pricing. This imbalance arose when traders and banks became the primary purchasers of LME warrants and futures contracts instead of producers and consumers.

“As trader rather than user dynamics took root in the LME warehouses, the level of the Midwest premium became driven by trading dynamics rather than actual supply and demand of aluminium users,” Judge Forrest explained in her ruling.

“These dynamics included the arbitrage opportunity presented by decreased demand due to the severe market downturn, followed by the expectation of higher prices in the future. This ‘buy low now to sell higher later’ view of LME traded aluminium is alleged to have led defendants to take actions designed to maximize their profits – including obtaining and retaining large inventories of aluminium traded by warrants and futures contract and creating load-out queues and delays.”

“A direct result of this was to increase storage duration, thus storage costs, thereby increasing the Midwest premium,” the ruling said.

However, the economics of these arbitrage opportunities were self-evident and legal. For example, it was “sensible” for warehouse owners, who make money from charging rents, to angle for longer queues, the judge said.

Additionally, the traders and banks acted in their own self-interest by taking advantage of a wide contango and historically low interest rates to enter into lucrative long-term financing arrangements.

“That traders, who would close out of a position to lock in arbitrage profits were benefitted by holding to a temporal point when such opportunity was maximized, is self-evident,” Judge Forrest said.

Forrest added that she could not see any clear reason why the traders or warehouse operators would want to intentionally increase the Midwest premium.

“That the combined actions of traders and warehouses to maximize their profits negatively impacted downstream purchasers through a rise in the Midwest premium is clear – but as cast in the complaints, this was an unintended consequence of rational profit maximizing behaviour rather than the product of conspiratorial design,” the judge ruled.

Judge Forrest ruled that two groups of plaintiffs, namely commercial end users and consumer end users, lacked antitrust standing and will not be allowed to refile another legal action.

However, she did leave the door slightly ajar for first level purchasers, which are companies that buy primary aluminum products pursuant to written contracts wherein the purchase price was based on the Midwest premium.