Brewer MillerCoors LLC urged U.S. lawmakers and regulators to boost oversight of the London Metal Exchange (LME) and Wall Street banks’ ownership of warehousing firms, saying inflated aluminum prices have cost buyers billions of dollars.
The Chicago-based brewer, speaking on behalf of the some of the world’s biggest drinks firms, blamed a lack of regulation in the United States and Britain for creating an “economic anomaly” in metals markets that has pushed prices higher, even as supplies have grown.
“U.S. bank holding companies have effective control of the LME, and they have created a bottleneck which limits the supply of aluminum,” Tim Weiner, global risk manager for the brewer, said in a statement to the U.S. Senate banking committee ahead of a scheduled hearing on Tuesday.
“Aluminum prices … have remained inflated relative to the massive oversupply and record production,” he said.
The hearing will be the first by Senators to discuss banks’ ownership of physical operations from metals warehousing to power plants.
Weiner’s comments, the first public testimony from aluminum users on the issue, will likely increase pressure on regulators to delve into the lucrative and controversial industry.
The U.S. Commodity Futures Trading Commission (CFTC) has already started preparations for a possible investigation of the metals warehousing business late last week, as reported by Reuters on Sunday.
It also comes ahead of a Federal Reserve decision on banks’ ownership of physical commodity assets in September and after the central bank’s surprise statement late on Friday that it was rethinking a decade-old decision that allowed banks to trade in physical commodities.
Industrial users have been increasingly frustrated over the past three years as stockpiles of aluminum and other base metals have built up in warehouses that are part of the LME network, leading to big log jams and lengthy queues.
Aluminum users have in some cases waited 18 months to take physical delivery of metal, all the while paying rent for storage, Weiner said.
The queues have caused the price premium on some metals, such as aluminum and zinc, to surge, prompting accusations that banks and traders that own storage facilities are artificially inflating prices and distorting supplies.
Weiner said record high physical aluminum prices have cost the Chicago-based brewer tens of millions of dollars in recent years. Last year alone, he estimated soaring prices cost aluminum users some $3 billion in extra expenses.
Weiner said it was “unfair” that banks own the biggest warehouses in the LME’s vast network and, as members of the exchange, helped set the exchange’s warehousing policy which sets low requirements for metal withdrawals.
He also called on the Fed to tighten up its supervision of Wall Street banks and the big merchants that now dominate the warehousing industry.
Goldman Sachs Group Inc owns Metro International Trade Services, one of the largest metals warehousing firms in the LME’s vast network, and JPMorgan Chase & Co has Henry Bath. Among the merchants, Glencore Xstrata Plc operates Pacorini Metals and Trafigura has NEMS.
Some banks are already scrambling to transform their physical businesses. Goldman and JPMorgan are also considering selling Metro and Henry Bath respectively.
Weiner’s testimony touched on two big issues that have frustrated industrial users: inaction by the LME and a lack of regulation.
The LME previously “dismissed” Weiner’s proposals to ease wait times, he said, and U.S. and UK regulators told him they were not certain about their authority over warehousing. The LME is regulated by the UK’s Financial Conduct Authority.
“We simply ask for the same regulatory and legislative oversight of the LME that other U.S. futures exchanges receive,” he said.
Under mounting pressure to ease the wait times, the exchange announced on July 1 sweeping reform of its warehousing policy, its third attempt to placate angry users.
If approved, those changes will only come into effect in April.
Weiner said he was representing companies along the supply chain, including drinks makers Coca Cola Co and Dr Pepper Snapple Group, Rexam Plc which makes cans for Coke, Red Bull and Carlsberg beer, and flat-rolled aluminum producers Novelis Inc and Ball Corp.
While the hearing will be largely a chance for Senators to get familiar with the complicated issues, market participants say it will have big ramifications for the banks.
Tuesday’s hearing and the Fed decision will “mark the beginning of the end for the warehousing issue and may have far more painful implications for the banks in the future,” said Nick Madden, senior vice president and chief supply chain officer at Novelis in a blog on Monday.
“It didn’t have to come this far if the LME had acted more seriously two years ago when presented with the potential risks and obvious solutions.”