Overnight, traders trying to access metal backing the LME’s futures contracts were hit with tens of thousands of dollars in extra costs for work that took a matter of minutes. If any refused to pay, their metal stayed put, meaning the warehouse could keep charging rent. After furious complaints, Metro International Trade Services was reprimanded by the LME for charging to discourage withdrawals from its sheds.
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.
For buyers, queues are inconvenient if they need the metal urgently. But LME rules also say that anyone waiting for more than 80 days can stop paying rent, which means that extra-long backlogs can actually be profitable plays. The company has since halved the fee after receiving an inquiry from the LME, but it’s still roughly three times higher than the norm.
When aluminum demand plunged after the global financial crisis, Metro struck deals with traders and producers to stash more than a million tons of unwanted metal in warehouses in Detroit. Rental income started pouring in, and the windfall was so large that it attracted the attention of Goldman Sachs, which bought Metro for $451 million in 2010.
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