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 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 and Trafigura 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.
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'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.
(Reporting by Josephine Mason; Editing by Bernard Orr)
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