The NY Times on Sunday offered a long piece purporting to examine the latest outrage being perpetrated by Goldman Sachs upon a hapless, helpless public:
A Shuffle of Aluminum, but to Banks, Pure Gold
Groan - commodity speculation? I am confident there are some serious issues here related to the appropriate lines of business for a firm operating with an implicit Federal backstop. However, based on my experience in reading Times coverage of areas within my personal expertise, I am also grimly confident that when the Times covers commerce they leave their comfort zone when they move beyond publishing and women's fashion. OK, I'll give them men's fashion too.
The Times introduces an arithmetic problem in the early going, which was a bit of a blow on a Sunday morning:
Only a tenth of a cent or so of an aluminum can’s purchase price can be
traced back to the strategy [described earlier]. But multiply that amount by the 90 billion
aluminum cans consumed in the United States each year — and add the tons
of aluminum used in things like cars, electronics and house siding —
and the efforts by Goldman and other financial players has cost American
consumers more than $5 billion over the last three years, say former
industry executives, analysts and consultants.
Say it with me, Dr. Evil: $5 BILLION DOLLARS! And that figure entrances The Gawker and Yves Smith, both of whom attribute it to Goldman as profit rather than the consumer as added expense.
But does the $5 billion figure number make any sense? Hmm.
Per the US Geological Survey's figures, for 2012:
Based on published market prices, the value of primary metal production was $4.32 billion.
That was for 2,000,000 metric tons of primary consumption. A lot of aluminum is also recycled and some is imported, so "Apparent consumption" in the United States for 2012 was estimated at 4,520,000 metric tons. That has a total market value, at their figure of $0.98 per pound, of roughly $10 billion. Consumption was a bit less in 2011 and 2010 but average prices were a bit higher; some quick arithmetic gives me an estimate of $26 billion for total aluminum consumption in the US in the last three years.
And $5 billion of that went from the sheeple to Goldman Sachs? Scandalous! But wait - what happened to "Only a tenth of a cent or so of an aluminum can’s purchase price can be
traced back to the strategy...". "Only" hardly seems appropriate if the net impact of this price manipulation is a 20% price increase.
So what does an aluminum can cost, anyway? Well, one can weighs 15 grams, or about half an ounce. 16 ounces to a pound implies 32 cans per pound. And this source says 33 cans per pound, so so far, so good.
At roughly a dollar a pound for aluminum, one can has about 3 cents worth of metal. Even with processing cots of zero, the one-tenth of a cent described by the Times is nowhere near 20% of the total cost; it is more like 3.3%, actually.
This discrepancy does not boost my confidence, which was low at the outset of the story. Further diminishing my confidence is this:
Because Metro International charges rent each day for the stored metal,
the long queues caused by shifting aluminum among its facilities means
larger profits for Goldman. And because storage cost is a major
component of the “premium” added to the price of all aluminum sold on
the spot market, the delays mean higher prices for nearly everyone, even
though most of the metal never passes through one of Goldman’s
warehouses.
Aluminum industry analysts say that the lengthy delays at Metro
International since Goldman took over are a major reason the premium on
all aluminum sold in the spot market has doubled since 2010. The result
is an additional cost of about $2 for the 35 pounds of aluminum used to
manufacture 1,000 beverage cans, investment analysts say, and about $12
for the 200 pounds of aluminum in the average American-made car.
Wel, $2 per 1000 cans is 0.2 cents per can, which is twice their earlier estimate. But $2 on 35 pounds of aluminum valued at $35 is still only 5.7%, not 20%.
$12 per 200 pounds of aluminum (at $1/lb) in a car is a percentage of 12/200 or, hey, 6%. Well, they are at least providing a consistent estimate, even if it is just one-third of their eye-catching "$5 billion" figure. And sure, $1.7 billion of excess costs is, well, excessive. Of course, the notion that all these storage fees represent pure profit is untested - one might think that storage ought to cost something.
What the Times seems to have discovered is the Twilight struggle between end-users and speculators. Just what was meant to happen when the global economy hit the skids in 2008? Aluminum producers could (a) stop mining bauxite, the raw material, (b) stop smelting bauxite into aluminum, or (c) make the aluminum and store it (or sell it to speculators willing to do just that) in hopes of higher prices down the road. Depending on the material, storage may be the least expensive option (As an alternative example, Saudi Arabia simply pumps less oil during price slumps, but storing refined oil is problematic.)
With a proper futures market mining and smelting can be smoothed out a bit and "excess" production simply stored. Speculators took advantage of low interest rates to do just that with a number of metals. End users naturally squawk because these "hoarders" are "driving up prices", which is undoubtedly correct - if producers were obliged to sell all of their output despite a collapse in demand, either prices would plunge more than they did, or the expense of shuttering mines and smelters and laying off workers would be incurred.
The idea that any of this is new, or only began when Goldman entered the market in 2010 is absurd. The Times is promoting this now because there will be a Senate hearing on Tuesday and the Democratic chair wants some attention. Mission accomplished!
MY NEW BEST FRIENDS: Goldman Sachs comments:
An unnamed Goldman executive gave Politico the company’s response to the
Times story, saying that it “grossly inflated the power of warehouses
in the aluminum market.”
I concur.
ERRATA: Two graphs show us aluminum prices and inventory over the last five years:

And LME inventory:

Some additional snippets for flavor. First, users v. speculators, June 23, 2013:
A trade group representing brewers
is urging the London Metal Exchange to take steps to reduce
warehouse backlogs that beermakers say boost the cost of
aluminum used to make drinks cans.
The Beer Institute in Washington pressed the exchange to
“end restrictive and outdated warehousing rules and practices
that are interfering with normal supply and demand dynamics,”
according to a statement provided yesterday by Christopher
Thorne, a spokesman for the group. Members include MillerCoors
LLC and Anheuser-Busch InBev NV (ABI)’s Anheuser-Busch unit, according
to the organization’s website.
...
Warehouse queues for aluminum have grown as more metal gets
tied up in financing deals that typically involve a simultaneous
purchase of metal for delivery in the near future and a sale for
later delivery that takes advantage of a market in contango,
where prices rise into the future.
The premium buyers pay to obtain aluminum in the U.S.
climbed to a record 12 cents to 13 cents a pound this week,
according to Austin, Texas-based researcher Harbor Intelligence.
If the normal premium is 6 cents per pound than the Goldman premium is at the 6% figure the Times seems to be using.
Cranky Congressman. And let me endorse the notion that there are some real issues here, even if the $5 billion figure is just NY Times hype and mirrors.
A hypothetical warehouse operator, from Oct 2 2012:
Let’s get something straight from the
outset: before you beat up on me for running a warehouse business, cast
your mind back to 2008, when the economic downturn slammed metal demand.
Who stepped in to provide a home for all the excess supply? The
warehouse firms did.
So don’t tell me we’re the bad guys.
If we hadn’t reacted so quickly and efficiently to give you space to
store metal, LME prices would probably be a lot lower than they are
today.
Do you know how long I had to wait for this? The business is cyclical.
For many years, my sheds looked like empty, paved football fields.
Some of us went into the logistics game. Others stored household items
and electronics to claw back a little of the losses. Some of us didn’t
have any metal in the sheds at all. It was a really tough time. Nobody
paid us for just existing.
Now times have changed, and suddenly I’m getting heat from all
directions.
One of the consequences of the steady inflow of metal to my warehouses
is that sometimes there’s a wait to get it out again. What did you
expect?
Headscratching from October 3 2012:
The storage of London Metal Exchange-approved metal has probably never been so controversial.
Opinions over the rights and wrongs of the LME’s system differ not just among producers, traders and consumers, but also within warehousing companies themselves.
Whether you like the queues or not, the fact remains that warehousing firms appear to operate within the LME rules.
Of the 26 companies that operate warehouses in 37 different locations
around the world, none has ever been found to have breached LME rules
governing load-out rates, breached Chinese walls or failed to maintain
their LME-approved facilities according to exchange requirements.
Neither has a consumer failed to get enough metal to run its operations
effectively, including an enforced shutdown due to metal being stuck in
an outbound queue in Detroit or Vlissingen, where companies each store more than 900,000 tonnes.
In fact, producers have found a home for their metal during a downturn,
traders and banks have found a lucrative new income stream in the form
of financing deals, and warehouse owners have never had quite such a
bonanza.
Ultimately, metal in financing deals is still available – it just has a
price attached. The rapid rise in premiums for physical delivery is just
one part of the phenomenon.
Although it can be argued that everything links back to long waiting
times to access metal, premiums are still at elevated levels across the
world and in locations where no queues exist.
If nobody is actually doing anything technically wrong – and nobody is
really struggling to get metal for consumption – then what is all the
fuss about?
Something doesn’t smell quite right, but nobody can really put their
finger on what it is. If the firms are operating within the rules, then
do the rules need changing?
Looks like manipulation, or something - in New Orleans the warehouses have long queues but still want more metal:
New Orleans warehousing firms are offering
lucrative incentives for copper to be put into storage in their sheds,
which already have huge queues for material, traders said.
A total of 4,525 tonnes of copper
went into the city's London Metal Exchange-approved warehouses last week
alone, with parcels of Chilean metal being taken into stock on
incentives of more than $100 a tonne.
The high incentives could create a new flashpoint in the debate about
warehousing because owners of metal in New Orleans warehouses are
already having to wait about six months to obtain their metal, people
familiar with the issue told Metal Bulletin.
“There’s a concerted effort to buy the Chilean material that is floating
around to put into New Orleans warehouses and create a queue,” a trader
whose firm is active in physical copper in the region said. “Incentives
of over $100 are being offered, and it’s simply a game to tighten the
market,” the trader added.
Lord Copper, Oct 12 2012, blames easy money and the desire to promote jobs rather than cut production:
If we look at
aluminium, there is currently, let’s say, something more than 10 million
tonnes of metal sitting in long-term storage, taking advantage of the
economic situation I describe above.
If circumstances were not as they are, I believe that post-2008, the
price would have dropped further (not being supported by warehouse-trade
buying), which would have resulted in more and swifter production cuts.
That would have helped to balance supply and demand, which, after all, is what the fluctuating futures price normally does.
Instead, not only have production cuts been delayed, but stock is also a
burgeoning stock which will serve to depress future prices when demand
climbs again.
In other words, a well-meaning attempt to ease the financial crisis will
have serious knock-on effects in the future, and that is the problem the warehouse trade and its attendant queues is telling us exists.
More background is here, although I surely can't vouch for it.
MORE DATA: A recent Bloomberg article offers this for the math mavens:
U.S. Aluminum Premium Seen Falling as Storage Incentives Slide
...
The premium slid to 11.8 to 12 cents a pound this week from
a record 12 to 13 cents, Jorge Vazquez, managing director of the
Austin, Texas-based researcher, said by e-mail today. Storage
incentives dropped to 8.6 cents a pound from 10.5 cents and are
poised to slide further, he said.
More in this recent Bloomberg article:
Since 2010, the additional cost to aluminum users is about $3 billion
annually, according to the Beer Institute, a Washington-based trade
group that represents brewers.
Buyers have to pay premiums over
the LME benchmark prices even with a glut of aluminum being produced.
Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in
June, almost doubling from 6.5 cents in mid-2010, according to the most
recent data available from Austin, Texas-based researcher Harbor Intelligence.
So the machinations of Goldman et al have raied the premium by about 6 cents per pound, which is line with the 6% figure we gleaned from the NY Ties numbers. But now the Beer Institute is saying that the annual global cost is $3 billion? Or is that the US domestic cost?
If it is domestic, that is double the NY Times $5 billion figure and won't be right. The global market for aluminum is about 50 million metric tons, or about $100 billion (Yes, I am surprised by how small the US share is). So if Goldman is adding 6% to the cost, that should be $6 billion per year, not $3 billion.
I will square the circle by asserting that China is both a large producer and large consumer and may be insulated from this premium play. In which case, maybe half the global market is suffering a 6% distortion totalling $3 billion per year.
Well - if the US is half of the non-Chinese market (its not) then we can approach that $5 billion figure. My BS detector remains in the red.
I avoid whole cities and neighborhoods in large cities so metaphorically I am "crossing the street" to avoid entire black population centers.
Well, he is choosing to avoid high crime areas, but the map looks the same.
Which reminds me of a story... back in the high crime days of New York city I had a friend who was prepping for a multi-day Grand canyon hike by back-packing all over Manhattan. He told us that one evening he went up to Harlem and hung around on a street corner. Since this guy looked as Irish as a potato, we asked him whether that worked out well. "Yeah, no one hassled me" he said. "In fact, after a few minutes the corner sort of cleared out and everyone left. I think they figured I was a narc or something."
Which is Yglesias' point - most people aren't thugs.