'Immoral, but not illegal': metal warehousing games in the spotlight

Complex deals employed by Goldman Sachs' (GS.N) metals storage unit to build vast stockpiles and then maintain queues test the spirit of the London Metal Exchange operating code, shocking many traders and confirming others' suspicions.

But the intricate transactions that saw Metro International Trade Services LLC shell out millions of dollars to customers to join exit queues to bolster rental income was within the rules, according to two senior warehousing executives and two veteran traders.

An explosive U.S. Senate report released on Wednesday revealed the "imaginative" methods used to lure millions of tons of aluminum into Detroit, Metro's headquarters, and then keep it there over the past four years.

A fiery hearing of the Senate's Permanent Subcommittee on Investigations on Thursday offered the clearest insight yet into the deals that metal users say created bottlenecks, leading to two-year long queues and pushing physical prices to record highs even as oversupply grew.

For Nick Madden, Senior Vice President and Supply Chain Officer of Novelis, the world's biggest aluminum user, the report confirmed his "worst fears", he told the subcommittee hearing led by Democrat Senator Carl Levin.

It also explained the "strange" things going on in the opaque market over the past four years, he said.

Madden has been one of the most fiercest critics of the LME and the warehouses, which he has blamed for years-long queues and inflated premiums, costing consumers billions of dollars in added costs.

While the detailed report was critical of how the bank has exploited huge commodity stockpiles, it did not contain any smoking guns.

One warehousing source, who is familiar with these transactions, said what he read in the report was "immoral, but not illegal".

Chris Wibbelman, Metro president and chief executive, rejected the report's findings in testimony to lawmakers on Thursday, saying the business has played by the rules.

Still, the details reignited a years-long debate on how the ownership of warehouses has transformed the metals market.

Madden has repeatedly called on regulators to ban trading houses, like Glencore (GLEN.L) and Trafigura [TRAFGF.UL], and banks from owning storage sheds.

Massive 100,000-metric ton (110,230 tons) cancellations of warrants in Detroit and Vlissingen in the Netherlands, where Pacorini Metals, Glencore's storage business, has the majority of its sheds, have roiled the market since 2010.

'Q MANAGEMENT'

The first alarms were sounded within Metro as early as December 2010 when Mark Askew, then vice president of marketing, said he was worried about rumors that a big cancellation of warrants was aimed at blocking other customers in the queues, the report showed.

That was just months after the first of six such merry-go-round deals that saw the wait time balloon to as long as two years, with millions of tonnes stuck in queues.

"I remain concerned, as I have expressed from [the] start, regarding 'Q management' etc" he wrote in an email to Wibbelman.

He quit in April 2013.

Wibbelman told the subcommittee in closed-door meetings that Askew "had never liked the idea" of offering financial incentives to existing Metro customers, the report said.

He denied that it was designed to help put a queue in place to block other clients from leaving.

What's not clear is whether the report and the public airing of concerns about the deals by the Senate subcommittee may exert pressure on the Commodity Futures Trading Commission and other regulators.

Under new owners, the LME has tried to introduce sweeping new warehousing rules, but has faced legal challenges from Rusal Plc (0486.HK). Aluminum producers benefit from the high premiums, particularly when LME prices were below the cost of production.