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Goldman's new money machine: warehouses

REUTERS, London/Detroit
In a rundown patch of Detroit, enclosed by a cyclone fence and barbed wire, stands an unremarkable warehouse that investment bank Goldman Sachs has transformed into a money- making machine.
The derelict neighbourhood off Michigan Avenue is a sharp contrast to Goldman's bustling skyscraper headquarters near Wall Street, but the two operations share one important element: management by the bank's savvy financial professionals.
A string of warehouses in Detroit, most of them operated by Goldman, has stockpiled more than a million tonnes of the industrial metal aluminium, about a quarter of global reported inventories.
Simply storing all that metal generates tens of millions of dollars in rental revenues for Goldman every year.
There's just one problem: only a trickle of the aluminium is leaving the depots, creating a supply pinch for manufacturers of everything from soft drink cans to aircraft.
The resulting spike in prices has sparked a clash between companies forced to pay more for their aluminium and wait months for it to be delivered, Goldman, which is keen to keep its cash machines humming and the London Metal Exchange (LME), the world's benchmark industrial metals market, which critics accuse of lax oversight.
Analysts question why London's metals market allows big financial players like Goldman to own the warehouses which store huge quantities of metal even as
they trade the commodity. Robin Bhar, a veteran metals analyst at Credit Agricole in London says the conflict of interest is so acute he wants US and European antitrust regulators to weigh in.
"Ithinkitmakesamockeryofthe market It's a shame," Bhar said. "This is an anti-competitive situation. It puts (some) companies at an advantage,andcleariytherestofthe market at a disadvantage. It's a real, genuine concern. And I think the regulators have tolookatit."
Goldman said its warehouse subsidiary Metro International Trade Services has done nothing illegal, and abides by the LME's warehousing rules. "Producers have chosen to store metal in Detroit with Metro," a Goldman spokeswoman said. "We follow the LME requirements in terms
of storing and releasing metals from our warehouses."
The London Metal Exchange defends its rules. "There is a perception that consumers have not been able to get to their metal when the reality is that it is big banks, financing companies and warehouses that are not able to get to their huge tonnages of metal fast enough," said LME business development manager Chris Evans.
BUSINESS MODEL
Goldman's warehouse business relies on a lucrative opportunity enabled by the LME regulations. Those rules allow warehouses to release only a tiny fraction of their inventories per day, much less than the metal that is regularly taken in for storage.
The metal that sits in the
warehouse generates lucrative rental income.
Little wonder that so many want in. Metro was acquired by Goldman in February 2010, while commodities trading firm Trafigura nabbed UK-based NEMS in March 2010, and Swissbased group Glencore International acquired the metals warehousing unit of Italy's Pacorini last September.
Henry Bath, a warehousing firm and founding member of the London Metal Exchange in 1877, has been owned for about 40 years by traders or banks including Metallgesellschaft in the 1980s and failed US energy trader Enron at the turn of the century. It now comes under the umbrella of JP Morgan, which bought the metals trading business of RBS Sempra
Commodities in July last year.
Despite its rental income, Goldman's warehouse strategy apparently hasn't been enough to snap a slumping performance in commodity trading, with the company reporting a "significant" drop in revenues from a year ago in its latest quarter, the sixth time in the past 10 quarters that it has failed to expand.
CONSUMERS FUME
The long delays in metal delivery have buyers fuming. Some consumers are waiting up to a year to receive the aluminium they need and that has resulted in the perverse situation of higher prices at a time when the world is awash in the metal.
"It's driving up costs for the consumers in North America and it's not being driven up because there is a true shortage in the market. It's because of an issue of accessing metal ... in Detroit warehouses," said Nick Madden, chief procurement officer for Atlanta-based Novelis, which is owned by India's Hindalco Industries Ltd and is the world's biggest maker of rolled aluminium products. Novelis buys aluminium directly from producers but is still hit by the higher prices.
Madden estimates that the US benchmark physical aluminium price is $20 to $40 a tonne higher because of the backlog at the Detroit warehouses. The physical price is currently around $2,800 per tonne. That premium is forcing US businesses to fork out millions of dollars more for the 6 million tonnes of aluminium they use annually.
It has also had a knock-on impact on the global market.