CHICAGO Big banks role in physical commodities markets came under fire at a U.S. Senate hearing July 23, with London Metal Exchange aluminum warehouses in Michigan facing sharp criticism from lawmakers.
MillerCoors LLC currently waits a year to 18 months to get metal out of LME warehouses in the Detroit area, according to Tim Weiner, the companys global risk manager for commodities and metals. "Imagine a warehouse with a huge door marked in and a tiny door marked out, " Weiner said, blasting LME rules, premiums paid by warehouses to attract metal and high rents charged to customers.
Such factors drive up prices for consumers and stymie end-user innovation, costing MillerCoors tens of millions of dollars every year and other end-users billions, Weiner said. MillerCoors has approached the LME about its concerns, but only minor changes have been proposed that "do not go far enough, fast enough" or correct underlying problems such as bank stakes in warehouses and their role in shaping LME policies, he said.
Proposed new rules by the LME aimed at limiting long waits for metal (amm.com, July 1) would not take effect until April 2014 at the earliest, Weiner noted.
MillerCoors doesnt encounter similar problems with other commodities, such as barley, necessary for its day-to-day operations, he said, noting that the company has also found regulators in the United States and abroad unable or unwilling to address problems with the LME.
"We simply ask for the same regulatory and legislative oversight of the LME that other U.S. futures exchanges receive in order to level the playing field," Weiner said, adding that action is needed to restore confidence in the LME.
Such comments appeared to garner sympathy from both Democratic and Republican senators.
"What do we want our banks to do ... issue mortgages or corner the metals markets?" Sen. Sherrod Brown (D., Ohio), asked, characterizing LME warehouse rules as peculiar.
Sen. Pat Toomey (R., Pa.) agreed. "It seems rather odd that a large buyer of a commodity cannot access that commodity in a timely fashion," he said.
A potential conflict of interest exists when financial institutions can both make bets on physical commodities and influence supply, University of North Carolina at Chapel Hill law professor Saule T. Omarova said, questioning the relationship between Goldman Sachs Group Inc. and Metro International Trade Services LLC, a warehousing company owned by the bank.
Goldman Sachs currently has the right to appoint Metros board members and engage in extensive consultations with Metros management, Omarova said. "Its very hard to tell how much informal influence Goldman Sachs ... exerts over Metro Internationals management decisions," she said, questioning whether the Federal Reserve was doing its job of probing such relations on the ground.
Goldman Sachs defended its position in the commodities market July 23, contending that it acts in the interest of investors and that warehouses allow metals producers to store excess stock in times of weak demand, such as the 2008 financial crisis.
Inventories in LME-listed warehouses more than tripled during the financial crisis, resulting in large amounts of metal accumulating at some warehouse locations, the bank said.
A spokeswoman for the LME said it has worked since 2010 to shorten warehouse queues, adding that there is no aluminum shortage in the market. The LME is legally prevented from capping rents or preventing trading companies from owning warehouses, she said.
Elizabeth Warren (D., Mass.) argued that big banks have essentially taken the model of the former Enron Corp. and applied it to physical commodities. "And that movie does not end well," she said.