01 February 2012

Commodity Wars: JP Morgan Stockpiling Inventory to Influence Prices, the Flow of Goods, and Rents

"We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time."

Bill Gross

Crony capitalists are never interested in the risk and rigor of 'free markets,' only in the surety of monopolies and obtaining a license from the authorities for extracting rents from them. They alternately create artificial abundance and scarcity to influence prices, with the objective of lining their pockets.

This move by JP Morgan to enlarge their warehouses and stockpile key commodities helps to demonstrate the growing scramble for resources which is a recurrent theme, and at the same time it shows the pernicious influence of mingling government guaranteed customer money and subsidized Federal Reserve funds with what is essentially private speculation.

JP Morgan is a bank that was rescued by public funds, and that exists at the sufferance of the US government and their money. Some of the pampered princes of the Republic would like to turn the financial sector into a new House of Lords.

Still, there may be a mutual interest between the government and their bankers in influencing the world's flow of key commodities. And if a few friends become wealthy in the process, well, so much the better.

JP Morgan adds muscle to metal warehousing money
By Josephine Mason and Susan Thomas

NEW YORK/LONDON (Reuters) - Investment bank JP Morgan (NYSE:JPM - News) is bulking up its metal warehousing facilities in Rotterdam and Chicago, industry sources say, in a business that consumers complain deliberately delays delivery of metals to boost revenues from rent.

London Metal Exchange rules allow warehouse companies to release only a fraction of their inventories per day, much less than is regularly taken in for storage, creating long queues to get metal out and guaranteeing rental income.

JP Morgan's aim is to fill its Henry Bath warehousing arm with inventory in the two port cities large enough to rival trading house Glencore's Pacorini and U.S. bank Goldman Sachs'(NYSE:GS - News) Metro.

The Pacorini and Metro facilities in Vlissingen, Netherlands and Detroit combined are estimated to hold around half of the global London Metal Exchange (LME) aluminium stocks which stand at just under 5 million tonnes.

Sources at JPM say the bank is pursuing a strategy to consolidate warehousing in the two locations to create the next Detroit or Vlissingen. A JPMorgan spokesman declined to comment.

"They (JPMorgan) are rebuilding stocks again," a high-level industry source in the Netherlands said.

Complaints about long queues, particularly in Detroit, prompted the LME to raise minimum delivery rates - 3,000 tonnes a day for operators with stocks of over 900,000 tonnes in one city - but traders and analysts say the new rules will make little difference when they come into effect in April.

The JPM strategy is likely to inflame consumers and traders already angry about the influence of warehousing companies on the flow of metal.

J.P. Morgan is already preparing to store aluminium in Europe's largest port, Rotterdam, where it has over 30 sheds.

The bank, the largest by assets in the United States, was behind the cancellation of 500,000 tonnes of LME aluminium warrants in Vlissingen, just 50 miles away from Rotterdam, on December 21, traders and warehousing sources told Reuters. Cancelled warrants show metal is earmarked for delivery.

"They are taking material from producers or traders, or trying to get it out of the market place - they were lucky to get 500,000 tonnes out of Vlissingen -- and moving it to Rotterdam," said the industry source.

Citigroup analyst David Wilson said there had been a large number of copper cancelled warrants in St Louis and New Orleans, many carried out by JP Morgan.

"It wouldn't be a surprise if they wanted to move metal into their own warehouses," Wilson said. "The cancellations don't fit in with the underlying demand picture."

It is unclear how much metal JPM wants to eventually hold in the two locations, but to compete with its two closest rivals, it will require millions of tonnes, most likely aluminium which has the most ideal characteristics for long-term storage deals.

Glencore drove Pacorini's emergence as a dominant force in New Orleans and Vlissingen. The Dutch port holds nearly one million tonnes of aluminium.

Traders said Metro holds most of Detroit's 1.4 million tonnes of aluminium stocks, and is ideally located to attract surplus aluminium in North America.

There were other signs in recent weeks that the bank's focus has shifted after traders reported JPM sold a large number of warrants, or ownership titles to metal, to release funds.

"JPM have dumped a large amount of warrants or sold very cheaply," a senior source at a warehousing company said. "They've let go of a lot of warrants they were holding onto."

Read the rest here.