UPDATE 2-Under fire, Goldman offers way round warehouse lines
NEW YORK, July 31 (Reuters) - Goldman Sachs responded to mounting political pressure and regulatory scrutiny of its Metro International metals business, by offering customers immediate access to aluminum stored in its warehouses on Wednesday.
In a statement outlining the bank's proposal to cut waiting times at all London Metal Exchange warehouses, Goldman Sachs said it would make aluminum immediately available to major consumers.
Customers and U.S. lawmakers have accused Goldman Sachs and other warehouse owners of artificially inflating wait times and lines to boost rents for warehouse owners and cause metal prices to rise. One major customer estimated the delays have cost consumers more than $3 billion.
"Goldman Sachs is contacting end users to offer to swap any aluminum currently in the queue for immediately available aluminum so that they have access to the metal they need to make or package their products," the bank said.
The offer applies only to metal consumers, the bank said, not to financial traders like hedge funds, or rival merchant commodity traders like Glencore Xstrata or Trafigura.
The move marks Goldman's first effort to address the long-simmering issue, which finally erupted last week as lawmakers on the Senate Banking Committee questioned why banks should be involved in commercial businesses like warehousing and chartering oil tankers.
It also highlights a sharp divide in how Wall Street's biggest banks are responding to unprecedented scrutiny of their physical commodity businesses. Goldman, whose J. Aron trading unit is one of the most renowned in the business, vowed to hold onto Metro, despite having considered a sale earlier this year.
But rival JPMorgan Chase & Co. said on Friday that it was quitting the business due to regulatory pressures, selling or spinning off the group that includes metals warehousing firm Henry Bath & Sons, the fourth-largest storage business in the LME system.
"We will end up selling Metro at an appropriate time," Goldman's Chief Operating Officer Gary Cohn said on business news television channel CNBC. Goldman Sachs bought Metro under a private equity exemption, he said, which allows the firm to keep it as an investment for up to 10 years.
Cohn said no Metro customers had taken up Goldman's offer - yet.
Regulators including the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission have begun preliminary investigations into Wall Street banks and other large commodity traders which own metal warehouses, Reuters has reported.
Goldman Sachs bought Metro International Trade Services, an international network of metals warehouses, for around $550 million in 2010, the first in a wave of such purchases by big banks.
JPMorgan, Glencore and Trafigura are among the other major players that also have warehouses.
The U.S. Senate Banking Committee held its first hearing on the issue last week, when aluminum users represented by brewer MillerCoors LLC said high physical prices have cost consumers an extra $3 billion a year in expenses.
Others large aluminum consumers, including Coca-Cola Co and sheet supplier Novelis Inc have also complained.
The warehouses and the London Metal Exchange, which oversees the storage outlets in its network, say the big stockpiles and high physical prices are the result of low interest rates and a market structure known as contango, which makes it profitable to sell metal forward and store it for months or years at a time.
It is also the byproduct of LME rules, which require warehousing companies to deliver a minimum amount of tonnages of metal each day. According to current rules, facilities with 900,000 tonnes or more metal have to load out 3,500 tonnes of metal.
Under fire from irate users, the LME has proposed an overhaul of its warehousing policy that would come into effect next April.
In its Wednesday statement, Goldman said it supported more transparency, including disclosure of which companies hold the aluminum and other metals in the LME system.
The bank proposed that end users like car manufacturers should be prioritized in the lines before other users like traders and funds. A source at Goldman also said that such customers would not be required to pay the cash price premium for the physical metal.