Goldman Sachs on Aluminum and Physical Commodities
As part of our activities as a market maker, or intermediary between buyers or sellers, in commodities and commodity futures and derivatives, Goldman Sachs, like a number of other financial institutions, holds physical commodities in inventory.
- We hold an inventory position in a particular physical commodity for the purposes of meeting the needs of our clients or as a hedge for positions in commodity futures or derivatives we assume as a market maker.
- And, to fulfill this market making role, we sometimes take delivery of physical commodities just as we do government bonds and stocks in financial markets.
We also hold other physical commodity operations as investments. This includes Metro International Trade Services, a metal warehousing company we bought in 2010, and which operates under the regulations of the London Metals Exchange (LME).
- During the financial crisis, warehouse companies played the important role of allowing metal producers, who are often unable to adjust immediately to changes in demand, to store excess metal in the face of weak consumer demand. In fact, LME aluminum inventories more than tripled from 1.2 million tonnes pre-crisis to more than 4.5 million tonnes by the middle of 2009. As a result, large amounts of metal accumulated at some locations.
Recent news reports have inaccurately accused Metro of deliberately creating aluminum shortages and incorrectly asserted that Metro moves aluminum from one warehouse to another in order to earn more rent fees.
- In fact, it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives.
Some additional key facts about global aluminum markets and the LME system:
- Aluminum stored in Metro warehouses amounts to approximately 1.5 million tonnes, compared with global aluminum production in 2012 of about 48 million tonnes.
- Approximately 95 percent of the aluminum that is used in manufacturing is sourced from producers and dealers outside of the LME warehouse system.
- The LME warehouse companies do not own the metal in their facilities. They merely store it on behalf of the ultimate owners.
- In fact, LME warehouses are strictly prohibited from trading all LME products. Trading affiliates of a warehouse operator do not have any information regarding warehouse operations as such trading is separated by LME-mandated information barriers, the integrity of which is verified through regular independent audits.
- Delivered aluminum prices are nearly 40 percent lower than they were in 2006. The warehousing system is not driving up the price of aluminum.
- Certain facilities owned by non-bank holding companies have queues, while certain facilities owned by bank holding companies do not have queues. The queues that exist in various warehouses are a function of market structure and LME rules.
- At any time, a company can buy aluminum from a producer. In fact, in recent years there has been more production than consumption. The more immediate sourcing of aluminum from the LME system would be a last resort for a corporate end user given that it always takes a certain amount of time to get inventory out of a warehouse.