(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON Oct 7 It was almost exactly six years
ago that Deutsche Bank cancelled 100,000 tonnes of aluminium
sitting in London Metal Exchange (LME) warehouses in Detroit.
It was the largest cancellation of metal in the LME's
history and bloated the load-out queue at sheds operated by
Metro from a benign 20 days to a monster 120 days.
So began a saga that splintered global aluminium pricing,
bitterly divided the industry between producers and
manufacturers and embroiled the LME in a media and regulatory
Six years on and there is a sense that this chapter in LME
history is now drawing to a close.
Physical premiums have returned to something close to
normality, albeit with some residual effects from the infernal
The LME has completed an overhaul of its physical delivery
network that has gone way beyond simply killing off the queue
And now a U.S. judge has dismissed the last remaining legal
action against Goldman Sachs, Glencore and JPMorgan and their
respective Metro, Pacorini and Henry Bath warehousing companies.
Even Judge Katherine Forrest of the Southern District Court
of New York concedes there may well be an appeal, but the
failure of similar parallel legal action at the appeal stage in
August suggests a high legal hurdle if the case is to proceed
That failed appeal at the second circuit directly influenced
the most recent judgment.
Judge Forrest had previously dismissed the case brought by
companies classified as "commercial end users" and "consumer end
users" of aluminium.
The appeals court upheld her judgement by 3-0.
"The manner in which that appeal was briefed and argued,
combined with the Second Circuit's rationale in its decision,
cast serious doubt on the viability of the remaining claims," by
companies categorised as "first level purchasers" of aluminium,
according to Forrest.
Forrest had quite a lot to say about the issues arising from
such overlapping of cases, which the legally curious can read
about in a blog by Alison Frankel on this link: reut.rs/2dRpqR7
But at its core the appeals court ruling was that the
negative impact on aluminium purchasers from an explosion in the
physical U.S. Midwest premium due to what Judge Forrest termed
the "alleged shenanigans" in LME warehousing amounted to
If anti-competitive behaviour occurred, and the emphasis was
on the "if" in that statement, then it occurred in aluminium
"The physical aluminum market is a secondary locale in this
drama," according to Judge Forrest, particularly since none of
the plaintiffs were directly involved in storing or trading
metal in the LME warehouse system.
Any alleged injury resulting from the load-out queue at
Detroit was "suffered down the distribution chain of a separate
market, and was a purely incidental byproduct of the alleged
That finding by the appeals court applied equally to the
"first level purchasers" case, according to Forrest.
CAUSE AND EFFECT
All of which may seem like legal nicety to many in the
aluminium market who watched physical premiums go super nova in
tandem with the lengthening load-out queues, first at Detroit
and then at the Dutch port of Vlissingen.
But the legal argument does capture a core truth about the
much-disputed interaction of queue and premium.
Thanks to Senator Carl Levin and his detailed
cross-examination of Metro and Goldman executives about the
Detroit queue back in November 2014, there is plenty of public
detail about that original Deutsche cancellation and the other
"merry-go-round" deals that followed.
And it is clear that when Metro offered Deutsche the
original "merry-go-round" deal, whereby the bank could earn
discounted storage if it moved its metal off-market to Metro
sheds and then re-warranted them in Metro sheds, no-one was
thinking about the potential impact on the Midwest premium.
Rather, it must have seemed a clever solution to every
warehouse operator's dilemma of how not to "lose" metal to
competitors once it is cancelled.
After all, if Goldman really had been thinking about
manipulating the premium, it would have bulked up with physical
metal when it bought Metro in February 2012.
But it held zero physical aluminium at the time. And even
though it did start incrementally building a position, it
amounted to only 93,000 tonnes by the end of the year, less than
Deutsche had just cancelled.
It seems that Goldman and everyone else only realised there
was a linkage between queue and premium after Deutsche's big
And they and everyone else started adjusting their trading
Which is how markets work.
Something happens and the market adjusts, a process of
evolution that generates an unpredictable chain reaction over
Remember when premiums went through the roof at the start of
2014? That was not due to the Detroit queue mechanics but rather
to a bank trying to capitalise on the sudden demand for a
premium hedging tool and getting its exposure wrong.
By the end of that year the market had adjusted further to
the point that banks, funds and physical players were trading
the queue itself, a trade based on the mathematics of queue
length and resulting storage costs.
It took a barrage of measures from the LME to kill off this
new queue market.
And it has succeeded, notwithstanding the legacy load-out
queue at Vlissingen, which is now incrementally decaying.
Metro has since been sold by Goldman and the LME has slapped
it with a retroactive $10 million fine. JPMorgan has also sold
Henry Bath, leaving only Glencore in the LME logistics space.
And the aluminium market has moved on, leaving the
queue-premium dynamic as an interesting but ultimately
unresolved historical footnote.
Judge Forrest herself perhaps best summed up the linkage in
her dismissal of the first case.
"That the combined actions of traders and warehouses to
maximise their profits negatively impacted downstream purchasers
through a rise in the Midwest Premium is clear but (...) this
was an unintended consequence of rational profit maximising
behaviour rather than the product of conspiratorial design".
Pending appeal, of course.
(Editing by Ruth Pitchford)