Istim Metal has the aluminum futures market on the ropes. The main storage company of the London Metal Exchange (LME), the world’s largest metals futures market, has found a loophole in the system through which it lines its own pockets at the expense of companies that, faced with bottlenecks, decide to reintroduce the merchandise. It is the latest initiative of the Whelan family, a saga linked to the metals sector which was the architect of two of the biggest scandals of the LME, which occurred at the beginning of this century and which threatened to overthrow the system.
The LME board is shaken by one of its main players. Founded in 1877 due to price uncertainty and delivery dates for metals arriving from overseas were different once they arrived in London, the LME has since been responsible for arbitrageuring futures contracts for metals such as nickel, zinc, copper or aluminum. The latter, used in the manufacture of aircraft or construction materials, is the subject of a large LME storage strategy which distorts its price, disrupts the market and puts operators on the ropes.
Istim Metalsthe main aluminum storage company of the LME, discovered a loophole in the regulatory manual of the metallurgical futures market, valued at $15 billionwhich allows you to obtain considerable advantages. This company, owner of almost half of all metallurgical storage in the LME, took advantage of last year’s bottlenecks in the global market to increase the metal reentry rate this amount must be paid by companies that decide to return the material whose extraction they had initially requested. These new registrations increased as traffic congestion increased, and as the LME did not set a cap on this rate, Istim Metals saw an opportunity to take advantage.
A handful of dollars for each ton
Thus, the company increased the price of storage in its facilities located the Malaysian town of Port Klangwhich hold more than three quarters of the entire LME deposit. Specifically, Istim Metals increased the rate from the usual range of $5 and $10 per ton to $50 per ton. Although this summer the company reduced the price to $27.50, in the heat of LME investigations, the cost remains significantly higher than usual.
This context puts in check futures operators whose contracts expire this month. Typically, these traders, who act as arbitrators to maintain the balance between actual market prices and futures prices, can roll over these contracts at an affordable price to protect themselves from market fluctuations. However, queues, which in Port Klang reached 280 dayshave made new futures contracts more expensive, leaving traders in a very difficult position.
On the other hand, Istim Metals does not seem to have played alone. Last May, Trafigura, one of the largest commodities operators in the worldplaced a huge quantity of aluminum in Istim Metal’s warehouses in Port Klang. Great news for the storage company, since these companies charge a fee to have the metal in their inventory. However, Trafigura’s rival companies, such as Squarepoint and Citigroup, reacted quickly by launching a coordinated request for metal mining. This generated enormous waiting for small operators, the duration of which, at the end of August, was estimated at more than nine months.
It was at this precise moment, taking advantage of the fact that some companies decided to re-register the metal they had requested in the warehouses of Istim Metals, that this company increased the rate of receipt of goods. A move that did not surprise Trafigura, a company that at the time was taking a long position in mid-November futures, hoping for an increase in profits.
Background and interests of Goldman Sachs
As things stand, it appears that the Whelan family, founders of Istim Metals, have once again won their case. Its CEO, Michael, is the son of William, founder of Metro International Trade Servicesa company that seriously misrepresented the LME twice in the first decade of the 21st century. So, in 2002, Metro announced the imposition of a fee to securely stow trucked goods taken from its LME warehouses. This made market costs higher and led the LME to push Metro to reverse its plans.
However, Metro returned to the fray ten years later. Although after the Great Recession demand for aluminum plummeted, Metro wove a network of agreements with operators and producers to store the material in its facilities, artificially increasing the cost of storing a material that no one wanted. The company has attracted the attention of Goldman Sachs, a company that acquired Metro in 2010 for $451 million.
Subsequently, Metro, now under the control of Goldman Sachs, deliberately organized bottlenecks to profit from storage fees. As a result, both companies were investigated by the US Senate, after which Goldman sold Metro, agreeing to pay an additional sum. $10 million fine to LME due to the distortions caused.
This, however, did not deter Michael Whelan, who returned to the metallurgical arena as head of Istim, a name created from the initials of Metro read backwards. Its latest strategy, based – according to the company itself – on a plan of Protect Your Profits in a Low Profit Margin Businessputs futures traders on the ropes, putting the entire LME structure in a very delicate position.
Currently, some companies like CME refused to register its metal at Istim’s facilities located in Gwangyang (South Korea) after the negative “feedback” obtained by the said agent company at the LME. It remains to be seen whether the London Metal Exchange will be forced to modify its statutes to prevent this lucrative mode of business for Istim Metals.
