The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly

Author:Kate Kelly [Kelly, Kate]
Language: eng
Format: epub
Publisher: Penguin Group US
Published: 2014-06-03T00:00:00+00:00

8

GOLDMAN SACHS

During the summer of 2011, officials at the London Metal Exchange got an unexpected complaint from The Coca-Cola Company. The amount of physical aluminum in storage was piling up, said a representative of the soda maker, and, along with it, so was the expense of buying the metal for beverage containers.

The culprit, as Coke saw it, wasn’t simple supply and demand—in fact, there was plenty of aluminum sitting in warehouses. It was the shrewd tactics of Goldman Sachs, the bank that owned a network of metal-storage facilities in the Detroit vicinity, where waiting times for extracting aluminum were longer than ever. Every day those metal bars sat idle, Goldman’s warehouse company effectively drove up the premium amount that aluminum producers could charge for delivering supplies to beverage-packaging factories, a cost that amplified the expense of the actual metal and, thus, the prices Coke and others paid for soda cans.

“The situation has been organized artificially to drive premiums up,” said Dave Smith, Coke’s head of strategic procurement, at an industry conference that June. “It takes two weeks to put aluminum in, and six months to get it out.”

Smith, a midlevel executive, was speaking somewhat out of turn. Despite its complaints with the warehousing system—which industry participants considered to be a market of last resort when aluminum supplies were tight—Coke had tried to keep its concerns about Goldman behind the scenes. More than a year earlier, eight players had complained privately to the London Metal Exchange, or LME, the obscure London metals bourse that set the benchmark price for aluminum, zinc, copper, and other important nonprecious, or base, metals that were key in manufacturing. The U.S. warehousing system that the exchange oversaw was so inefficient that it was hurting corporate profits, they had argued.

The Midwest premium, the regional U.S. rate for getting metal from a seller to a buyer, was a cost imposed on Coke and other manufacturers in addition to the cash, or spot price of aluminum, which was by then bouncing back from its lowest levels in some time. Aluminum prices had increased 13 percent since the beginning of 2010, when Goldman had paid half a billion dollars to acquire Metro International Trade Services, the metal storage business based in Romulus, Michigan. Bought relatively cheap at a time when commodity prices were low, Goldman took on Metro as a way to broaden its suite of physical commodity holdings, which had become an important complement to its derivatives trading in London and the U.S. Around the same time, it had also bought coal-mining assets in Colombia.

In addition to the revenue those investments offered it, they presented Goldman with the possibility of a free look at what was happening on the physical side of commodities through ground-level operations. Tweaking existing contract trades in a commodity based on feedback from colleagues who worked in the physical markets was by then commonplace in banking. “We had pipeline capacity all over the place and we would call up and say, ‘How’s gas flowing this morning?’” remembers a trading manager who worked for years at one of Goldman’s competitors.

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