HardAssetsInvestor

Written by Tom Vulcan  |

March 23, 2012

Metals Warehousing: The Perfect Hedge & The Perfect Storm?

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Banks and other financial institutions are acquiring metals warehouses for several good reasons, which has created supply problems.

In the world of metals warehouses, and, in particular, LME-approved warehouses, there is one name that stands out boldly: C. Steinweg Handelsveem BV. Why? Because it remains independent. Indeed, it is now the only big LME-approved warehousing company that still has no link to either a trading or banking member of the London Mercantile Exchange.

Bankers And Traders Go On A Spree

The latest purchase of a warehouse by a trader was announced as recently as March 14 when Bloomberg Businessweek reported that, through LD Commodities Metals Asia Private Ltd., the big trading firm Louis Dreyfus Commodities BV had agreed to buy a majority stake in the GKE Metal Logistics Pte Ltd., a company that offers warehousing both in Shanghai and Singapore — where it has five warehouses.

This last deal is just the most recent in a line of such transactions that, over the last several years, have tied up metals warehouses with banks as well as trading companies.

In a spree in early 2010, three of the biggest metals warehouses lost their independence.

In a Feb. 16 deal, and as part of a larger transaction in which it bought a significant portion of RBS Sempra Commodities’ business for some $1.6 billion, JPMorgan acquired the venerable Liverpool-based English company Henry Bath that has been in the business for more than 200 years.

Just three days later, Goldman Sachs announced that it was buying Detroit-based Metro International Trade Services in a deal reported to have been worth around $550 million, although no figure was disclosed by Goldman.

Then, in the last of these big deals, at the beginning of March, the Swiss-based trading company Trafigura announced the acquisition of NEMS Ltd (North European Marine Services), yet another LME-approved warehouse with operations around the globe.

Of the big warehousers, this left only Trieste-based Pacorini and C. Steinweg independent. However,  Pacorini went the next year, when Glencore agreed to buy it (for $209 million) in August 2011.

(As an interesting aside, while the LME allows its approved warehouses to be owned by trading companies — as long as there are “Chinese  walls” — this is not the case with the Minor Metals Trade Association, which, following its acquisition by Glencore, delisted Pacorini’s warehouses and, following the announcement (in mid-2011) of its acquisition of Swiss trading company Marc Rich & Co Investment AG (MRI), delisted the warehouses of medium-sized, Singapore-based CWT Group.)

Other transactions involving traders or bankers and warehouses include the purchase by Barclays Capital of a stake in Erus Metals Ltd., based in Whitham, England, and of Delivery Network International LLC, “a U.S.-based manager of [two] LME licensed warehouses” by the trader Noble Group Ltd.

Why Warehouses?

So what’s the motivation? Not least, money. And, if press reports are to be believed, a great deal of money.

While the new warehouse owners are, of course, tight-lipped about how much they make from their warehouse investments, quoting available sources, and doing some extrapolation, as well as figures in a few Reuters’ articles from early February and early March this year, if indicative, are very illuminating.

In the first, financial reports from Glencore show that, for the three months alone that it owned Pacorini in 2010, the company made some $31 million profit, and that: “LME data show that as of February 2, Detroit warehouses — 80 percent Goldman-owned — held 1.36 million tonnes of aluminium. At a new rent of 45 cents per tonne per day [Goldman intends to introduce new rates on April 1], the warehouses could generate $612,000 a day in rental revenue alone.” Now that is serious money.

In the second, quoting figures from UK Companies House filings, Reuters shows that Henry Bath (now owned by JPMorgan) made profits of $110 million in 2009 and some $80 million in 2010. Once again, healthy sums.

But the warehouses’ profitability is really only just one part of the story. Following are some of the others.

First, from a business perspective, what a great way to hedge. When the metal markets are down, demand is down and stockpiles are mounting, where is all the metal kept? Metal warehouses. Anti-cyclical, certainly; the “perfect” hedge, perhaps.