UPDATE 1-Under pressure, Goldman offers customers access to aluminum
NEW YORK, July 31 (Reuters) - Goldman Sachs on Wednesday responded to mounting political and regulatory scrutiny of its Metro International metals business, offering customers immediate access to aluminum stored in its warehouses.
In a statement outlining the bank's proposal to reduce lines at all London Metal Exchange warehouses, the bank said it would make aluminum immediately available. Customers and U.S. lawmakers have accused Goldman Sachs and other warehouse owners of artificially inflating lines to boost rents for warehouse owners and causing metal prices to rise.
"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.
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 Chase & Co., and trading companies Glencore and Trafigura are among the major players who 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 the 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.
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.
Goldman looked at a possible sale of its Metro International warehouse business this year. The bank also faces pressure from the Federal Reserve over its ownership of physical commodity assets.
On Wednesday, a source familiar with the business said the bank plans to keep the Metro business, and considers it a merchant banking investment that it would not have to sell until 2020.
Story Copyright © 1999-2014 Reuters HedgeWorld All rights reserved.