Goldman making changes in metals warehousing, availability
Goldman Sachs said Wednesday it will make changes to its commodities warehousing business to reduce concerns that the warehouses are limiting the supply of aluminum.
"In light of those concerns, we are making certain suggestions to improve the LME system and are taking unilateral action to help any end users who have metal in the queue at Metro warehouses," Goldman said in a statement.
Goldman has proposed increasing the size of metal outflows from storage under London Metal Exchange rules, establishing priorities for metal consumers over other storers, allowing consumers in need to advance in line and enhancing transparency about ownership of LME metals.
"We are consulting with the metals trade and industry on a proposal to amend the delivery out obligations of warehouse companies with long queues, and we encourage market users to contact us with their views," the LME said in response to the proposal.
Goldman's proposals come after increased regulatory scrutiny of Wall Street's commodities warehousing activities and an announcement from JPMorgan that it was looking for "strategic alternatives" for its physical commodities business.
Goldman and other financial institutions have been accused of inflating aluminum prices through their warehousing activities as customers have reported excessive wait times to get access to their metal, ultimately costing consumers billions of dollars.
"We feel horrible for consumers if they can't get metal. We don't believe that to be the fact," Gary Cohn, Goldman Sachs president, told CNBC. The bank has offered to deliver physical metal to consumers when needed, but none have taken it up on the deal, he said.
Goldman will stay in the commodity hedging business, he said.
(Read more: JPMorgan quits physical commodities business)
The increase in warehousing metals has been a consequence of the financial crisis. With interest rates low, a carry trade developed as many investors bought metals that they could sell at a future date for more than the cost of storing it. After inventories rose, investors sought to retrieve their metal primarily for the purpose of implementing new carry trades at warehouses outside the LME system that offered lower rates, according to Goldman.
That in turn lengthened the wait for aluminum and played a part in increasing the premium for physical metal or the discount at which LME warrants trade to spot metal, Goldman said. But the overall delivered price of aluminum is down nearly 40 percent since 2006, it said.
"The warehousing system is not driving up the price of aluminum, but, as a price-setting mechanism, is a factor into setting the physical premium over the spot price," Goldman said.
In 2010, Goldman Sachs bought Metro, a metal warehousing company that operates under LME regulations. Goldman said it is not involved in the day-to-day management of the company and does not consider it a strategic business.
It said that under U.S. bank laws it can own the metals storage business until at least 2020.
"We will end up selling Metro at an appropriate time," Cohn said.