'Shadow warehouses' are hoarding the world's metal

Banks, hedge funds and others have secret stores of aluminum, copper and nickel, and some worry they can manipulate the market at a moment's notice.

By MSN Money Partner Dec 27, 2013 3:13PM
Credit: © Monty Rakusen/Corbis

Caption: Stacked aluminum ingots in warehouseBy Tatyana Shumsky, The Wall Street Journal

The world's metal is slipping into the shadows.

Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.

These facilities are known to some in the industry as "shadow warehouses" because they are unregulated and don't disclose their holdings.

They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals.

As of October, a record 7 million to 10 million tons of aluminum were being housed in these facilities, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.

The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal.

A similar shift is taking place with other industrial metals, analysts say.

As a result, producers and consumers are bracing for potentially wild swings in metals prices as market participants have difficulty accurately gauging supplies of these metals. With no clear insight into how much metal is in the shadow system, setting prices will become increasingly difficult, they say.

Analysts and traders say the flow of metal into shadow warehouses already is making prices move in unpredictable ways -- such as when a large amount of unaccounted-for metal suddenly makes its way onto the market.

"It's a real concern for anyone in the industry that metal can be sucked away into a nonreporting location with no expectation or date as to when it's going to be available again," said Nick Madden, senior vice president and chief supply-chain officer with Atlanta-based Novelis Inc., an aluminum-products maker that is among the world's biggest buyers of the metal.

"The risk here is that the metal gets controlled by fewer and fewer hands, whose interests and business model is probably conflicting with that of end users," he said.

Industrial metals end up in all sorts of everyday goods -- from aluminum soda cans to copper wires inside refrigerators to zinc-plated steel in roofs. Turbulent raw-materials prices can make it more expensive to produce such goods when prices spike or limit output from mines and smelters when prices drop below their cost of production.

The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don't have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage, analysts and traders say.

However, metal owners can face higher interest rates from banks if they wish to use metal stored in shadow warehouses as collateral for loans, because banks see the LME system as less risky, analysts say.

Five companies operate 75% of the LME's 778 licensed warehouses. All own shadow facilities as well, people familiar with the companies said.

In some instances, a single firm runs licensed and unlicensed warehouses in the same building, with the metal counted by the LME separated from hidden stockpiles by a chain-link fence, said David Wilson, a commodities analyst with Citigroup (C). 

Until 2010, most warehouses were owned by logistics firms like Netherlands-based C. Steinweg Group. But as metal-financing trades became more popular, C. Steinweg was joined by units of Goldman Sachs Group (GS) and JPMorgan Chase (JPM) as well as commodity traders Glencore Xstrata (GLCNF) of the U.K. and Switzerland and Trafigura Beheer BV of the Netherlands.

All five companies declined to comment.

Metal consumers like Novelis say that prices could increase sharply if warehouse owners buy up large amounts of metal, creating a shortage.

Alcoa Inc. (AA), the largest U.S. aluminum maker, has the opposite worry. The company fears aluminum prices are vulnerable to a shock if a large amount of metal suddenly gets moved from shadow warehouses back to the LME's facilities, said Tim Reyes, president of materials management at Alcoa.

"If one day, 2 million tons of aluminum show up and it just went from one pocket to another pocket, it has an impact on price that it shouldn't, and that's a concern for us," Reyes said.

Such volatility makes it harder to make production plans, he said.

Many metal buyers and producers say they are worried that new rules approved by the LME in November will speed up the flow of metal into shadow warehouses.

Starting April 1, LME warehouses with wait times exceeding 50 days must deliver out more metal than they take in. The delays help boost income from rent and increase the fees paid for faster service, so warehouse owners are expected to increase LME rent charges to offset any reduction in profits.

The rules strike at a trade that has grown sharply since 2010, where investors buy the cheap physical metal and sell a futures contract on the LME at a higher price.

Meantime, the metal sits in an LME-licensed warehouse until the futures contract expires. Higher warehouse costs make this trade less profitable.

If applied today, the rules would flush aluminum out of LME-licensed warehouses holding 3.5 million tons of the metal, equal to 7% of annual global demand.

Warehouses holding copper and zinc also would be required to speed up the release of their stockpiles.

In a Nov. 7 report, the exchange said one potential negative side effect of the new regulations is that more metal could end up in shadow warehouses.

The LME in a statement said it has a duty to run a fair and orderly market and that the warehouse bottlenecks posed a range of issues in terms of price discovery.

The rule changes were made following a consultation process that included an examination of all concerns raised about the possible unintended consequences of any changes, it said.

"We believe that the package of measures contained in the proposal is, on balance, the best solution for all market users," the exchange said.

More from The Wall Street Journal

Dec 27, 2013 5:01PM
This reeks of the Days of Standard Oil. The elitist care not a bit to whether or not they Destroy entire Countries and Economies. They manipulate Crude prices regardless of supply and they manipulate literally everything else. These Money Changers were the creators of $500-700Trillion in Scam Banking Derivatives which caused the Great Recession. If WE the People don't get a clue real soon, the Great Depression will look like a Cakewalk once these Devils are done destroying everything they touch just for the benefit of the top 1%.

Dec 27, 2013 6:33PM
Greed still prevails. If they stockpile hidden assets, they can drive the price up, and leak their illicit bounty into the market while tripling their profits. And governments sit by, doing nothing, because the individual politicians know that they will also reap from this unscrupulous behavior.
Dec 27, 2013 4:26PM

"Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe. They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals."


It's only the 27th. We still have ample time to send the troops into New York and Wall Street. First, take down the Ivory Towers and the Super Computer Condo buildings surrounding them. Then head to the elite streets and pull the scum out. A shot to the head starting with the kids is going to help route the others. Apparently, these former humans forgot about US. It's time they remembered for that remaining moment between life and death. Happy New Year.

Close the banks, end the Federal Reserve and get RID of Wall Street. Feel free to go backward in my posts until you find the first time I stated that. The 2007-08 crash was artificial. Life since has been superficial. If you can't play nice in the sandbox, you deserve to be buried in it.  

Dec 27, 2013 4:26PM
soo shadow warehouses are another name for Middleman? ur confusing me, they been manipulating  prices forever,,,,,,,,,
Dec 28, 2013 12:55AM
Another consequence of government money printing.  Free market interest rates would have fixed this a LONG time ago.   Thanks alot everyone for not demanding a fed audit and its elimination.
How is this just suddenly a worry? It's been going on since these weasels have existed on wall street. Rich people know that when the crap hits the fan and society falls apart they can use this to buy and sell us poor folk.
Dec 27, 2013 6:29PM

People allow this because it"s "just busness". Time to stop this crap and put some of these inside traders in jail. Not for a few months or years, let's say ten to fifteen years for the first offence.  If they do this, this crap will stop and we'll have a true free market system.

Dec 27, 2013 6:40PM
People manipulating markets for personal gain...???? Say it ain't so.
Dec 27, 2013 5:33PM
Where did I put that tin-foil sombrero?
Dec 27, 2013 5:04PM
They must have something else in mind. How would releasing their holdings onto the market do anything but lower the price. The Hunt brothers ended up getting burned when they tried to corner the silver market.
Jan 20, 2014 5:28PM
Having a buyer for these metals in storage doesn't make the stored metals any more valuable. If the price of anything becomes too high then people have the power not to purchase it and tell these metal storage units owners too bad so sad I don't use your product anymore. What then happens to the inflated value of that stored metal ?  It becomes a buyers market if nobody wants it.  The soot covered walls of the early years made wall paper get soiled and someone invented a product to clean wall paper and made millions over the years. When coal was dropped as a fuel to produce energy the market for wall paper cleaner became a unneeded product. What did the company that produced the cleaner do ? they renamed their product Silly Putty and the rest is history. Same thing will happened to these fear monger metal hoarders they will lose their investment  Watch
Dec 28, 2013 4:24PM

More sensationalism. I guess that's what sells papers (or hits).

First, the idea that this is "secret" is laughable. Any company whose stock trades publicly has to have quarterly financial statements. If their assets are tied up in stores of metals, that has to be on the balance sheet. If they are a bank, the declarations are even more stringent, since they are required to have certain levels of liquid assets and metals are usually far down in the list of what is considered liquid.


And if I want to fill my basement with ingots of copper, aluminum, or nickel as an investment, why exactly do you have a right to tell me I can't? If I'm stupid enough to stockpile so much metal that the market plunges when I try to sell it, that's my stupidity and my loss. The market will go back to normal after it absorbs my sales. Now tell me: why it's different for any other company?


As for market manipulation, the best answer for that comes from the movie "Casablanca" when Louie says "I am shocked, SHOCKED, to find that there is gambling going on in your establishment!" Just grow up.

Jan 4, 2014 11:48PM

Oh gee, the LME can't CONTROL the world's supply of metals any more? Gee, what a SHAME!!!

All these other entities storing THEIR [that means, to you socialists, that it is metal that BELONGS to THEM, not some government] property outside of GOVERNMENT CONTROL [and potential seizure, remember] are being VERY smart.

One thing all you socialists and government control nuts need to learn: "If it isn't YOURS, keep your F*cking hands off it!!!!" If you stopped REGULATING and TAXING people to death, they wouldn't be trying to keep THEIR property HIDDEN away from you, you idiots!!!

Jan 22, 2014 8:12PM

I think Chinas buying it all !

soon they will own EVERY DAM THING !

Jan 21, 2014 10:01AM
Why am I not surprised to hear the likes of Goldman Sachs, and Morgan Stanley in the "shadows" again, manipulating another sector of our economy?
Dec 29, 2013 4:42PM
lME combined with 'shadow' warehouses has about 2-3 months of inventory at current demand for aluminum.  How is this outrageous?  Seems to be a pretty normal amount of reserves. This is just hysteria on the part of the author.
Dec 27, 2013 6:45PM
I remember seeing this on TV back in the 80's - Barney Miller - Season 6, Episode 15 - 1/24/1980: The Child Stealers. A guy from the future convinces Sgt. Ron Nathan Harris to buy and store a couple tons of Zinc, it will replace gold as a precious metal.
Jan 22, 2014 8:15PM
Jan 9, 2014 2:58PM
Yeah, they're riding high until someone figures out an easy way to refine titanium and then their hoards are worth diddly squat.
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