The mavericks of metals are back, rocking a $15 trillion market

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In 2002, the metals industry was jolted into uproar, after a US warehouse owner announced it would start charging a fee to safely buckle up each cargo being trucked from its depots in the London Metal Exchange’s storage network.

Now working at Istim Metals LLC they have introduced a charge that some say is contributing to a squeeze in the aluminum market that is threatening to come to a head in the next two weeks. The situation has drawn in global players including Citigroup Inc. and Squarepoint Capital LLP, and the LME is fielding complaints of unfair practices from some members. At least one party has complained to the UK’s financial regulator.

“The sad truth is everyone has learnt to love it, because they’ve realized that these inefficiencies of the market can be traded very profitably,” says a veteran metals trader who lodged a complaint about Metro’s handling fees in 2002 but is contractually restricted from publicly discussing his work at the time.

If prices shot up, the traders assumed they would re-deliver their metal to the LME. That’s just what happened over the past couple of months, as a spurt of buying sent prices for the main October contract jumping to a premium over the following month. The clash has also revived questions about the potential for conflicts of interest between storage companies and their biggest customers. It’s common practice for warehouses to offer a large slice of their rent — often about half — to the trader that originally delivered the metal, for as long as it remains in the warehouse. That means both parties stand to benefit the longer the metal stays put.

But it was the plan to keep the metal where it was that catapulted Metro and Goldman into the global spotlight. The company spotted a now-infamous clause in LME regulations: the minimum daily load-out rate to fulfill metal withdrawals could also be read as a maximum.

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