Not entirely convinced that I believe this aluminium manipulation story

Brewer Miller Coors last week told the US Senate that inflated aluminium prices were costing consumers $3bn (£2bn) a year, putting the focus on the stockpiles held by the Wall Street investment bank and the world’s largest commodity trading firm.

Together, the two firms are estimated to control two-thirds of the world’s stockpiles of aluminium, with Goldman Sachs holding 1.5m tons, while Glencore has 2m tons in its warehouses.

Aluminium prices have more than doubled in the past three years. At the same time, the amount stored in warehouses has hit a record 5.5m tons.

No, I don\’t know the details of this market. But something doesn\’t sound quite right about it.

Global annual production of aluminium metal is 45 million tonnes or so.

Yes, I know that prices work at the margin and all that. But I\’m deeply unconvinced that a stock of 10% of annual production is going to manipulate prices very much. I can imagine that it does indeed make a significant difference to who gets the profits from playing around with futures and spot prices. The speculators or the banks that own the warehouses. But I can\’t see how there\’ll be a significant link to general Al prices.

8 thoughts on “Not entirely convinced that I believe this aluminium manipulation story”

  1. Basic rule: if Goldmans are involved, something crooked is going on. Which is why, among other things, we should be very worried that they’ve parachuted one of their poddies into the Bank Of England.

    So, anyway, GS are a bank. Why have they got warehouses full of Aluminium? Going onto the aluminium standard, are we? Bent as a nine bob note, that lot. Something funny going on, must be.

  2. That ‘doubling’ of aluminium prices, is that off a very low price? A quick look and we see the price peaking in June 2008 at $3,000, dropping to $1,338 in mid 2009, climbing again to $2,700 in April 2011, then dropping to the current price of $1,800.

    So the price hasn’t doubled, it’s actually halved! That explains why they are closing Tiwai Point smelter in NZ and is also why you should never trust the numbers in a newspaper!


  3. So, anyway, GS are a bank. Why have they got warehouses full of Aluminium? Going onto the aluminium standard, are we?

    Its GoldmanSachs not GordonBrown, why would they sell at the bottom of the market.

  4. Going off the link provided by David Moore above I did some calculations about avergage prices over the last 30 years.

    30 years: $1,704.21
    25 years: $1,767.89
    20 years: $1,801.39
    First 15 y: $1,514.27
    Last 15 y: $1,895.20
    first decade: $1,506.21
    mid decade: $1,470.75
    last decade: $2,137.31
    Last 5 y: $2,090.22
    Current price $1,814.54

    So current price is below average for the last 5, 10 and 15 years, about average for the last 20 and slightly above average for the last 25 and 30 years. I think we can indeed safely call BS on this one

  5. @Francis, yes, average prices. But traders make their money on the change while they are holding (or waiting to deliver on their short obligations). Plus on some proportion of the spread for non-proprietary trading but that’s beyond the scope here.

    So holding enough of the metal to shift the spot price at apposite times would indeed be a great thing. Especially as you can then go and say – well look at that – we actually made a loss on our (physical) trades, while keeping silent about the speculative trades.

    Hence Tim’s querying whether this made any difference over the longer run to customers.

  6. Putting my aluminium foil thinking cap on…

    Canneries want to know their costs in advance. So they take out futures contracts as a form of insurance.

    The counter party used to be the smelters, but the informal cartel of keeping a few plants mothballed to show a large barrier to entry for any prospective competitor is being eroded by trade regulators.

    Enter the speculators (with balls of steel, because of course the price might rise). Who sell the futures contract, thereby pocketing the insurance premium.

    The smelters can’t cover all the demand for futures insurance as they don’t know the future (a strike / breakdown in the plant, e.g.). And their costs are largely energy costs. The ore costs peanuts. So smelters are in turn buyers of futures contracts for energy, where the counter party is an electricity generator. But the generator does not want to sell all his energy in advance (what if he can’t supply?). Re-enter the speculator.

    Sounds to me like a pretty normal description of capitalism as practised by farmers and bakers since the time of Sumer.

    Has IanB been reading the Guardian, by any chance?

  7. I have actually, but I knew Goldmans were the most evil non-governmental entity in the world before that. Because they are.

    We’ve now got Goldmans poddies running the Fed, BoE and ECB. Worried yet?

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