LONDON – New fronts are opening up in Europe and Asia in the battle between banks and trading houses to expand their storage hubs for aluminium, a metal meant for use in manufacturing but increasingly viewed as a store of value.
Until recently, the battle was almost exclusively confined to one location, Detroit in the US, where there is a months-long queue to get aluminium out of warehouses mostly owned by US investment bank Goldman Sachs.
The warehouses are part of a global network monitored by the London Metal Exchange (LME), the world's leading marketplace for industrial materials such as aluminium, copper and nickel, which aims to ensure metal traded via its contracts can be delivered reliably.
But over the past few months, industry players have looked on with increasing dismay as queues built up at LME-registered warehouses in the Dutch port of Vlissingen, and at storage hubs in the Malaysian port of Johor.
Commodity-trader Glencore owns most of the warehouses in Vlissingen, while all the big warehouse operators have LME-listed sheds in the Malaysian state.
Industrial users dislike the queues because not only do they face long delays getting their metal out, they also have to pay rent every day to warehouse owners that drip feed metal out at the minimum rate stipulated by the exchange - currently 1 500 t/d.
"In Vlissingen there's a six- to seven-month queue, in Johor it's a five- to six-month queue and regardless of which metal you want you still have to wait in the queue," said a trader at a commodities broker.
"The warehouse owners have guaranteed themselves, say, six months' rental income."
Just over half of the total 255 075 t of aluminium in Johor is waiting to be delivered out, while nearly all the 1.02 -million tonnes of aluminium in Vlissingen has been booked for delivery out of warehouses.
Taking Vlissingen, Johor and Detroit out of the system, there's almost no 'free-float' or available aluminium, because the rest of the 3.5-million tons is largely tied up in financing deals, said an analyst who declined to be named.
In a typical finance deal, a bank or commodity trader loans cheap money to buy nearby aluminium, immediately sells the metal forward at a profit and strikes a cheap rental deal to store the metal in the interim.
For banks that own warehouses, storage costs are extremely low, and money making opportunities plentiful.
The warehouse queues enable them to hold onto metal for as long as possible, while the financing deals - profitable in and of themselves - tie up metal and direct the little free float left over to a limited number of locations.
"It's not a squeeze in the traditional sense, but you've cleverly mutualised the metal available to consumers by just sticking it into the cancelled warrants queue," said the analyst who declined to be named.
Banks and trading houses have used aluminium and its storage as a financial tool to boost profits since the global financial crisis sent interest rates to historic lows and left markets awash with a large overhang of unwanted metal.
Their business model means inventory data - once a reliable guide to world demand for the light, versatile metal used for making cars and packaging - no longer reflect consumption trends.
Complaints by industry about long queues, particularly in Detroit, prompted the LME to raise minimum load-out rates from 1 500 t a day to 3 000 t for warehouse operators with stocks of over 900 000 t in one city, starting in April.
The new rules are expected to help shorten the queues, though they are not expected or even meant to eliminate them.
"The warehouse queues are a reflection of today's macro market dynamics," said LME spokesman Chris Evans.
He added, however, that: "The LME is constantly monitoring the situation to ensure that we respond appropriately."
Warehouse owners, especially those who can hold onto metal for as long as possible, look likely to stay in the money.
Goldman and Glencore, for example, plan to increase rents for storing aluminium in their Detroit and Vlissingen warehouses by around 10%, effective April. Other warehouse operators plan to step up rents by similar amounts.
A high level LME source said the rent rises, which come into effect at the same date as the load-out rate increase, are a move by the banks and trading houses to protect themselves from LME rules that potentially damage their business model.
"At 45 cents a day from next April onwards, the rate is more expensive than ever before. Has the price of real estate gone up in Detroit? No, it's cheaper by the day," said an industry source. "It's a great business."
In 2010, Glencore's Pacorini warehouse unit netted $31-million, while profits at JP Morgan's UK-based Henry Bath warehousing neared $80-million, about $1-million per employee per year.
And the bank is apparently hungry for more.
Industry sources told Reuters last month J.P. Morgan is currently moving 500 000 t of aluminium from Glencore's Vlissingen sheds to its own sheds in Rotterdam to expand its warehouse business. J.P. Morgan declined to comment.
It would take around 60 trucks a day about five months to shunt the metal down the road to nearby Rotterdam.
"If the delivery load-out rates were to go up (more than the new rules stipulate) this whole game would be over," said an industry source.
"It's a perverted situation," the source said.