The Journal reports that about 25% of London Metal Exchange stocks of Aluminum, are sitting in Goldman-Sachs and other big Investment bank-controlled warehouses. The total rental income is about $171 million (for all the owners, combined). The warehouses in New Orleans, contain about 59% of LME supplies of zinc, netting the owners a rental income of $70 million. Also in New Orleans, about 25% of LME copper nets annual rental income of about $16 million, and 73% of LME nickel supplies nets owners about $13.4 million.
These warehouses used to be independent, until Investment banks like Goldman-Sachs, and commodities firms like Glencore, bought them up in the past few years. Users of the warehouses like Coca-Cola, complain that they were lured in by cheap rental rates, but when they asked to pull their stocks out, were told they had to wait seven months, in some cases. Goldman releases only 1,500 metric tons a day (the minimum requirement by LME) of their stocks. Obviously a short-term play designed to drive up the prices of metals on the spot market (by restricting supply from warehouses) and possibly on the futures market as well.
Further, critics like can-maker Novelis, and Coca-Cola, charge that the I-banks and big commodities firms are using a "birds eye view" of what clients put in and request to be pulled out, to spot trends and trade off customer information in the commodities markets. You might recall, it was exactly this "trading off the customer's information" that was one of the more damning things to come out of the sub-prime meltdown financial crisis investigations, largely bearing out the charges made by Michael Lewis in "the Big Short" and various other critics. Historically Goldman-Sachs has been suspected of using customers as ways to gather an information advantage, and screw everyone in the market. The preponderance of Goldman-Sachs executives in the first Bush Administration, the Clinton Administration, the Bush II Administration, and the Obama Administration only furthers that accusation.
That accusation seems spot-on with the purchase of the metals warehouses. Formerly a "backwater" the warehouses don't earn much profit. Capital expenses are large (warehouses, guards, security, people to move the metal in and out, contracts with barges and trucking firms, it is no accident these warehouses are located in major ports or on industrial traffic rivers). The expertise in running large warehouses and synergy with what amounts to trading firms are nil. But ... the information to be gathered on what customers are doing with metals (storing them, or asking to take them out) can provide a key edge in trading the metals. With deals like sub-prime a thing of the past, basically Goldman-Sachs is looking for new people to screw over.
The ABCD firms that dominate basic commodity trading (Archer-Daniels Midland, Bunge, Cargill, and Dreyfuss) do so by having a huge network of spotters, counters, and other information/intelligence operatives in places like say, Abidjan, Ivory Coast, counting how much cocoa is actually being loaded into warehouses or shipped abroad. In many cases these networks providing intelligence took decades to construct (and are often highly illegal in the countries they operate in, many of them providing basic economic/commodity information that are state secrets). Agriculture is a tricky business, because sudden weather events can change almost every prediction, and often in the Third World expected harvests come in radically different due to rampant cheating one way or another.
For now, the big I-banks are seeking profits by ... well blatant manipulation of the metals spot and likely futures markets. Naturally this benefits metals producers, basically big mining companies like Xstrata or BHP Billiton. They get higher prices by restricting the supply sitting in warehouses. Of course, eventually the major users of metals will simply build warehouses themselves. And keep their data (what they put in and pull out) as private as possible. But if Coca-Cola or Novelis must build and staff their own warehouses (and nothing of course prevents them from doing so) their overhead becomes larger. Thus the prices they charge the customer in the end becomes higher.
What should have remained a staid, sedate business serving the specialized needs of big metals consumers in the US and elsewhere, has been turned upside down by what amounts to a set of elites with no boundaries or national feelings. Even Gilded Age Robber Barons had some sense of propriety, a shared nationalism that moderated the urge to gouge every last penny out of the average person. Even Standard Oil's John D. Rockefeller had limits:
In spite of the formation of the trust and its perceived immunity from all competition, by the 1880s Standard Oil had passed its peak of power over the world oil market. Rockefeller finally gave up his dream of controlling all the world’s oil refining, he admitted later, “We realized that public sentiment would be against us if we actually refined all the oil.”
What we can expect is far higher prices, for consumers, in almost every product using metals: every can of soda, every bit of consumer goods containing copper (such as blue jeans with copper rivets or a laptop), or zinc, or nickel, will cost more. Eventually, trust-busting such as brought Standard Oil to heel will be needed. But laws themselves will not be enough. The "smart guys" at Goldman-Sachs will always be searching for a new customer to screw, with the end "screwee" being the average American. The same is true of the other I-banks: JP Morgan, in particular, comes to mind. So too the massive firms like Glencore, incorporated outside the US (and trivia time, formed by a buyout of Marc Rich, yes THAT Marc Rich).
The US has always had people trying to say, corner the silver market. These individuals usually came a cropper because there was always the possibility of new supply over the horizon. Mining companies could mine more silver. Politicians could bust up trusts and force supply onto the market. No one individual no matter how wealthy could stand up to the government that had to act at least sometimes to avoid massive pain on the part of voters. But the problem today has gone far beyond individuals into institutions, with the institutions themselves becoming rotten to the core.
The rot is the result of an elite that fundamentally lacks any identification with, or even understanding, of the ordinary people in the nations in which they live and work. The folks at Goldman-Sachs are not only from all over the world, the ones born in the US feel little loyalty to their fellow citizens. In a word, they lack nationalism. A tie that binds the highest of the elite, the King or the Prime Minister or the President, and the lowly private, janitor, and factory worker.
While an excess of nationalism in its worst form can result in folks goose-stepping down the Champs Elysee, that's akin to saying since food can make some people grossly obese, no one should ever, ever eat anything. That strategy is only viable for supermodels (who have apparently the super power of not eating anything, ever, and existing on cocaine and smokes). For everyone else, eating is essential. So too for nations, nationalism is essential. Like everything good in life, all is well as long as no one goes overboard.
The modern globalized world is very very good at putting some of the smartest people, and some of the most privileged and hereditary privileged people, in powerful groups and letting them run amok in screwing over their ordinary peers in nations powerful and weak alike. Blogger Half Sigma has done outstanding work noting the privileged, rich background of most of the New York Times reporters and editors. The same people essentially make up Goldman-Sachs, or Glencore, or JP Morgan's executives. Plus of course elites from India, China, and other places. Their loyalty is to themselves, their own institutions, and their own hereditary interests. Like mini-royal families in Medieval Europe, they lack even the notion of a nation-state, and national interests, and shared ties with fellow countrymen. They deny even the notion of a country, instead seeing peasants, serfs, a few middling tradesmen, all interchangeable with others in other places. The modern, international corporate world is very good at producing people like this.
Indra Nooyi may be CEO of Pepsico, but how much loyalty does she possess towards Pepsi's American workers? To Americans as a whole? Her career encapsulates the modern elites lack of nationalism. Positions at Johnson and Johnson in India, then a textile firm, then consulting with Boston Consulting Group and strategy positions with Motorola and Asea Brown Boveri. Although a naturalized US Citizen, her main appeal as CEO is her extensive ties to India's elite. I am quite sure Nooyi is a fine person, but Pepsico could not find a more qualified CEO? The results of her leadership have not been good, with Pepsi sliding to #3 among US sodas, trailing both Coke and Diet Coke. Nooyi is quoted as saying she took steps to push "healthy foods" like Quaker Oats and Gatorade and such, and not sell "flavored sugar water." Pepsi has been neglected, lacking promotion compared to Coke, and the stuff Nooyi likes (an elite taste) account for only 20% of the US Pepsico revenues.
PC makes you stupid. So does pushing trans-national elites at a company where most revenues come from US sales. An Indian born Hindu understands US consumer tastes? When her entire career has been from one "strategy" posting to another? Nothing selling, well flavored and colored sugar water? That is what Pepsico is. But the pressure and power of the elites is frightening. [Trivia time, in the CW show "Gossip Girl," one of the characters, herself a "rich girl" plans to get an internship under Nooyi.] Reasoned Sceptic notes that the business press has been light on Nooyi despite her failures to match Coca-Cola because she is both Indian and a woman. Muhtar Kent, Coke's CEO, is of course also foreign born (a Turk) but is a Coke lifer, having started selling Coke out of trucks across the US. If I wanted someone to sell flavored colored sugar water, I'd pick Kent over Nooyi. The former seems to understand (having spent most of his life doing it) how to sell that stuff, and the other doesn't. Both are elites of course, having spoken at Davos (one is always an elite if one speaks at Davos).
Any nation can withstand some corruption and greed on the part of its elites. Those flaws are part of human nature, and can at best be only curbed, not eliminated. But in the end, it is not laws (nearly always evaded in one form or another) that curbs the greed, ambition, and power of the elites. It is, or at least has been since the late 1500s and the rise of the nation-state, nationalism that has curbed the worst excesses. By instilling among even the most greedy, ruthless, and powerful of the elites, a sense that there are lines better left uncrossed. That squeezing every spare penny out of the populace was a bad job, and better go across the ocean and squeeze it out of some other poor person from another country. Nationalism, and nationalism alone, promises a small shelter, perhaps poor, but the only one the ordinary person has got, from greed and cruelty and abuse by the elites.
Goldman-Sachs, JP Morgan, and Glencore will always seek advantage. They will always be looking for an edge. As long as there remain limits to what they will do, limits instilled by national feeling and solidarity, then while not perfect, the situation is tolerable for most people, most of the time. Good enough. But without those internal limits, no laws, no regulatory agency, no "perfect administration by perfect people" (not the least because no human being yet born has been perfect) will suffice. Making the urgent task not regulatory reform but the return of ...
Only that promises to restrain the otherwise un-alloyed greed and shadiness of institutions run by elites like Goldman-Sachs.