Regulators Examine Aluminum Warehousing; CFTC Sends Subpoenas to Firms that Store the Metal in Probe Over Prices

Updated August 12, 2013, 8:01 p.m. ET

Regulators Examine Aluminum Warehousing

CFTC Sends Subpoenas to Firms that Store the Metal in Probe Over Prices

SCOTT PATTERSON

WASHINGTON—Federal regulators have begun an investigation into whether some Wall Street banks artificially inflated the cost of aluminum and other metals at the expense of end users and consumers, according to people familiar with the matter. Commodity Futures Trading Commission enforcement officials sent subpoenas last week to firms responsible for storing and delivering aluminum, including Goldman Sachs Group Inc. GS -0.27% and J.P. Morgan Chase & Co., seeking documents related to their commodities operations as far back as January 2010, the people said.The investigation stems from complaints by end users, such as beer and soda companies, that firms responsible for warehousing the metal allegedly have inflated prices by holding onto aluminum for longer than necessary.

The added time boosts storage costs that are priced into aluminum upon delivery. The storage practices in focus are tied to warehouses approved by the London Metal Exchange, some of which are based in the U.S

The agency also is looking into the hedging practices of aluminum end users and whether any hits on their aluminum purchases could be traced to them, the people said. The CFTC is also focusing on copper and zinc, according to a person who reviewed one of the agency’s subpoenas. It asked for details related to the movement of metal stocks from one warehouse to another, the person said. Critics say shuffling commodities between warehouses can play a part in lengthening storage times and costs.

The CFTC is also looking into incentives paid by warehouse operators to producers and merchants who use their facilities and asked for documents tied to incentive payments, the person said. It asked for all communications, including audio files and instant messages, relating to fees and storage of aluminum, copper and zinc. It also asked for names of customers and records of trades in which a component of the trade is based on indexes that track commodity delivery prices, the person said.

The subpoenas come amid heightened scrutiny of Wall Street’s involvement in commodity and energy markets. The Senate Permanent Subcommittee on Investigations has sought information from several banks about commodity-storage practices.

The CFTC sent the subpoenas to Goldman as well as its Metro International Trade Services unit, which stores metals such as aluminum, copper and tin for the LME. J.P. Morgan, which owns the Henry Bath & Son Ltd. network of global metals warehouses, has said the company’s warehouses don’t have wait times for delivery. Goldman recently said it would provide immediate delivery of aluminum to warehouse customers. The bank had said the queues for delivery were the result of client orders and not caused by Goldman or Metro.

J.P. Morgan Chase & Co. said last month it was putting its physical commodities operation up for sale.