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Senate Scrutiny of Potential Risk in Markets for Commodities

July 23, 2013 by Leave a Comment

The hearing, convened by the Senate Financial Institutions and Consumer Protection subcommittee, came as Goldman Sachs, JPMorgan Chase and others face growing scrutiny over their role in the commodities markets and the extent to which their activities can inflate prices paid by manufacturers and consumers. The Federal Reserve is reviewing the potential risks posed by the operations, which have generated many billions of dollars in profits for the banks.

The hearing followed an article in The New York Times on Sunday that explored the operations of warehouses controlled in part by Goldman Sachs. The bank’s tactics, along with those of other financial players, have inflated the price of aluminum and ultimately cost consumers billions of dollars, an investigation by The Times found. The Commodity Futures Trading Commission is now gathering information on the warehouse operations.

Several witnesses at Tuesday’s hearings warned that letting the country’s largest financial institutions own commodities units that store and ship vast quantities of metals, oil and the other basic building blocks of the economy could pose grave risks to the financial system. The ability of those bank subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars, the witnesses said.

Representatives from the financial industry did not testify on Tuesday, but Goldman Sachs for the first time addressed its role in the aluminum market. In a statement posted on its Web site, Goldman said that its ownership of aluminum warehouses did not affect prices of the metal, in part because only 5 percent of the aluminum that is used in manufacturing passes through the warehouses owned by Goldman and others. Goldman controls 27 warehouses in the Detroit area that are used to store aluminum for customers.

In addition, Goldman said, delivered aluminum prices are nearly 40 percent lower than they were in 2006. During the financial crisis, warehoused inventories of aluminum more than tripled, the company said, because of weakened consumer demand.

The Times investigation found that Goldman’s warehouse subsidiary moved large amounts of aluminum among its warehouses daily, a process that lengthened the storage time and increased the premium that was added to the basic price of aluminum. The London Metal Exchange, which sets the rules under which the metals warehouses operate, said in a separate statement that it was working with the industry to amend the delivery obligations of warehouse companies with long waiting periods.

Even with the waiting periods, “there is no reported shortage of aluminum in the market,” the exchange said. “Consumers can continue to buy directly from producers as they always have done.”

Saule T. Omarova, a law professor at the University of North Carolina who has studied the issue, told the subcommittee that there was one other company that was an early leader in combining the practice of moving physical commodities with the financing of market activity — Enron.

The comparison was seized upon by Senator Elizabeth Warren, a Massachusetts Democrat. “The notion that two of largest financial companies are adopting a business method pioneered by Enron,” she said, “suggests that this movie will not end well.” Major beverage companies have complained about the maneuvers. Tim Weiner, a MillerCoors executive, told the panel on Tuesday that while consumers might not think they have much at stake from tons of aluminum bars stored in a warehouse near Detroit, the actions of Goldman and others have raised prices, cost jobs and hindered innovation.

That is in part because waiting times for customers who want to retrieve their metals purchases have grown to more than 16 months since Goldman Sachs took over the warehouses three years ago. Before Goldman arrived, the average wait was six weeks.

Imagine going to a liquor store to buy a case of beer, and taking it up to the cash register to pay, Mr. Weiner said. Then instead of taking the case of beer to your car, the clerk told you to visit the store’s warehouse, where you can retrieve the beer in 16 months.

Article source: http://www.nytimes.com/2013/07/24/business/senate-panel-examines-potential-risks-in-big-banks-involvement-in-commodities.html?partner=rss&emc=rss

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U.S. Weighs Inquiry Into Big Banks’ Storage of Commodities

July 22, 2013 by Leave a Comment

The Commodity Futures Trading Commission has taken the first step in an examination of warehouse operations that are controlled by Goldman Sachs, Glencore Xstrata, the Noble Group and others and used to store vast amounts of aluminum. The operations were the subject of an article by The New York Times that was published on Sunday.

The commission has told the firms to retain internal documents and e-mails related to the businesses, according to people who reviewed the requests and spoke on the condition of anonymity because the notices had not been made public.

The call comes as a Senate committee prepares to open hearings on Tuesday on how Wall Street has extended its reach beyond banking and into global markets for essential commodities. The panel is expected to focus on how banks have taken advantage of loosened federal regulation to buy warehouses, pipelines, oil tankers and other infrastructure used to store basic goods and deliver them to consumers.

The overarching question is whether banks should control the storage and shipment of commodities, and whether such activities could pose a risk to the nation’s financial system.

But other crucial issues are expected to arise as well. Among them is how Wall Street’s push into these markets has affected the prices paid by manufacturers and ultimately consumers. Another is whether Goldman and Morgan Stanley have operated their storage facilities at arms’ length from their banking business, as required by regulators.

Goldman has exploited industry pricing regulations set by the London Metal Exchange by shuffling tons of aluminum each day among the 27 warehouses it controls in the Detroit area, The Times reported on Sunday. The maneuver lengthens the storage time and generates millions a year in profit for Goldman, which charges rent to store the metal for customers, the investigation found. The C.F.T.C. issued the notices late last week, and it was unclear on Monday whether the agency or other authorities would open a full-fledged investigation into banks’ activities.

The agency’s request included a specific admonition against destroying internal documents or deleting e-mails, a warning that often precedes more formal inquiries. Among other things, the agency asked the companies to retain communications regarding monetary incentives that they provide to customers to store metal in the warehouses, as well as any complaints they may have received about their practices, according to the people who have reviewed the notices.

The delays at Goldman’s Detroit-area warehouses, which are owned by a subsidiary, Metro International Trade Services, make aluminum more expensive nearly everywhere in the country because of a formula used to determine the cost of the metal on the spot market. The delays are so long that Coca-Cola and many other manufacturers avoid buying aluminum stored there. Nonetheless, they still pay the higher price.

Michael DuVally, a Goldman spokesman, said that Goldman had arranged its ownership of Metro to be in complete compliance. A spokesman for the commission declined to comment.

Wall Street’s maneuverings in the commodities markets have added many billions to the coffers of investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more for gasoline, electricity and a wide range of products, from cars to cellphones. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and on Monday JPMorgan was working to reach a settlement that could cost it $500 million.

Tuesday’s hearings, led by Senator Sherrod Brown, Democrat of Ohio, will focus on banks’ ownership of aluminum warehouses, oil tankers and other facilities. Among those scheduled to testify is Saule T. Omarova, a professor at the University of North Carolina at Chapel Hill, who has been critical of bank ownership of commodities operations, and Tim Weiner, an executive at MillerCoors, the big brewing company.

For much of the last century, banks were barred from owning nonfinancial businesses, and vice versa. These restrictions were weakened or lifted during the 1990s, when Congress allowed banks to expand into storing and transporting commodities.

Questions about Wall Street’s activities in the commodities markets have been growing for years. A spokeswoman for the Federal Reserve Board said last Friday that the Fed was “reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.”

In 2008, during the depths of the financial crisis, Goldman Sachs and Morgan Stanley were granted bank holding company status; before that time they had been investment banks and not subject to the restrictions on commodities operations that covered commercial banks.

Still, it is unclear if big banks would be required to divest themselves of their commodities operations immediately. Goldman Sachs and Morgan Stanley purchased some of these operations as part of their merchant banking units, and regulations give them 10 years from the date of purchase to sell them. Goldman Sachs bought Metro International, the warehouse unit, three years ago, meaning it could hold on to the warehouse company until at least 2020.

One line of regulatory inquiry could relate to whether officials at Goldman, a bank holding company, are sufficiently separated from the activities of the merchant banking unit, which actually owns Metro International. Under the terms of the exemption under which Goldman bought the company, the two are supposed to be separated to prevent conflicts of interest.

Article source: http://www.nytimes.com/2013/07/23/business/inquiry-possible-into-storage-of-commodities-by-big-banks.html?partner=rss&emc=rss

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Thailand Set to Sell Off Huge Stockpile of Rice

March 28, 2013 by Leave a Comment

SUPHAN BURI, THAILAND — Thailand is set to sell 500,000 metric tons of rice on world markets at a loss as it scrambles to offload a record stockpile deteriorating in warehouses filled with grain bought under a government program.

The two-year-old policy of paying farmers more for rice than it is worth on international markets is straining the country’s finances, has cost Thailand its spot as world’s top exporter of the grain and has provoked concern at the World Trade Organization.

Although officials publicly deny that the politically sensitive effort is in a crisis, the government is looking at measures to stem ballooning losses that so far are estimated at $6 billion.

A Thai official also said this month that the government might cut the price it pays to a level closer to the value of rice in international markets, prompting an angry response from farmers. Bangkok may also stop buying lower-quality strains of the crop.

Rival producers like India and Vietnam, which have stepped into the vacuum caused by the exit of Thai exporters from the market, are watching closely in case Thailand dumps millions of tons of rice onto well-supplied world markets, causing prices to slump.

In questions brought before a World Trade Organization committee this week, the United States again challenged Thailand to explain how it planned to dispose of the rice.

Government stockpiles are estimated at a record 17 million metric tons of milled rice, nearly twice what Thailand used to export each year before the program was implemented two years ago.

An unraveling would be politically costly for Prime Minister Yingluck Shinawatra, given that the program helped her win millions of rural votes when she was elected in 2011.

Farmers say payments have been delayed, with the state bank running the program complaining that it has received only a fraction of the funds needed.

“The government might have run out of money. I’ve had to wait for two months,” said Prasert Chamsopa, 66, a farmer in the rice-growing province of Suphan Buri who had sold 35 tons from his paddy to the government.

According to the agricultural cooperative in the province, which is north of Bangkok, more than 1,000 farmers have experienced similar problems and were getting ready to stage coordinated protests with farmers in other provinces.

That leaves the government in a bind: It is committed to buying yet more rice, which it has no room to store and which it is unable to sell without suffering a huge loss.

One grade of Thai rice was offered at $545 per metric ton this week, down from $570 early this year but still above offers for the same grade from India of as much as $450 per ton and from Vietnam of about $400 a ton.

A Commerce Ministry official said that Thailand planned to release as much as 500,000 metric tons from older crops onto the market by April, and that the sale would be based on market prices.

“We accept that some of the rice is from the previous crop, which is quite old and the quality is not very good, so it’s impossible to ask for very high prices,” said Thikumporn Nartworathus, deputy director of the foreign trade department of the Commerce Ministry, adding that it would be sold via a tender or government-to-government deals.

Traders and industry officials say the government will suffer big losses if it sells now with plentiful supplies available from India and Vietnam and with the baht hitting a 16-year high this month, making Thai rice more expensive in dollar terms.

The intervention program, criticized by academics, economists and the International Monetary Fund, is coming under increasing global scrutiny.

At the W.T.O.’s agriculture committee meeting this week, Washington asked Thailand to say whether stocks were being exported or used domestically.

In questions seen by Reuters, the U.S. delegation said Thailand had previously said that data on the program, including figures on rice exports, were on government Web sites, but that the data had been discontinued.

Article source: http://www.nytimes.com/2013/03/29/business/global/thailand-set-to-sell-off-huge-stockpile-of-rice.html?partner=rss&emc=rss

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Floodwaters Are Gone, but Supply Chain Issues Linger

January 20, 2012 by Leave a Comment

KHLONG LUANG, Thailand — The floodwaters receded weeks ago from this sprawling industrial zone, but the streets are littered with detritus, the phones do not work and rusted machinery has been dumped outside warehouses that once buzzed with efficiency.

Before Thailand’s great flood of 2011, companies like Panasonic, JVC and Hitachi produced electronics and computer components that were exported around the world. Now of the 227 factories operating in the zone, only 15 percent have restarted production, according to Nipit Arunvongse Na Ayudhya, the managing director of the company that manages the Nava Nakorn industrial zone, one of the largest in Thailand and located just north of Bangkok.

“The recovery has not been that easy,” Mr. Nipit said in an interview Friday on the sidelines of a meeting where he sought to soothe anxious foreign factory managers.

The slow recovery here is having global consequences. Before the floods, Thailand produced about 40 percent to 45 percent of the world’s hard disk drives, the invaluable and ubiquitous storage devices of the digital age. It is now becoming clear that it will be months — significantly longer than initially expected — before production of hard drives returns to antediluvian levels.

The upshot for consumers worldwide is that they may face a prolonged period of higher prices for hard drives. In the United States, certain models are currently 40 percent to 50 percent more expensive than before the floods, levels that may remain for several months, analysts say.

“By the end of the year, HDD price could come back to preflood level for certain drives,” said Fang Zhang, an analyst at IHS iSuppli, a market forecasting company based in the United States. He used the acronym for hard disk drives.

John Coyne, the president and chief executive of Western Digital, which makes about one-third of the world’s hard drives, said this past week that production in the company’s factories in Thailand would not return to preflood levels until September. About 60 other companies that produce hard drives and components were flooded, he said.

The challenges facing all flood-affected companies in Thailand are apparent during a drive through the Nava Nakorn industrial zone. Rotting furniture and rusted file cabinets are strewn outside a Panasonic factory. Workers brought in from Cambodia are cleaning up — dredging filthy drainage ditches and cleaning up trash in front of a JVC facility. But more than a month after the last puddles of floodwater dried in the tropical sun, parts of Nava Nakorn, which means “new city,” still resemble a municipal dump. Large piles of garbage bags sit beside roads fissured and potholed by the floods.

Many buildings bear the telltale scar of the floodwaters — a high water mark about two meters above street level.

For most factories, the hopes of recovering machinery seems to have been dashed by the prolonged exposure to corrosive, polluted water — in some cases two months.

One manager at a factory that produces components for television sets described his machinery as “100 percent killed in action.” Mr. Nipit estimates that about 60 percent of machinery will be thrown away.

As they rebuild, many foreign investors seem anxious and uncertain whether the Thai government is taking enough measures to prevent another round of flooding during future monsoons.

On Friday, factory managers attended a presentation about future flood prevention measures. By August, the Nava Nakorn industrial zone is to resemble a fortress, with a giant flood wall around the perimeter and sealable aluminum flood barriers across entrance points.

But the audience at the presentation peppered the managers of the industrial zone with skeptical questions about the timetable of rehabilitation and the reliability of future flood forecasting.

Article source: http://feeds.nytimes.com/click.phdo?i=7740892a73c4d3c5134100efe3efa15d

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California Votes to Give Amazon a Sales-Tax Reprieve

September 10, 2011 by Leave a Comment

SAN FRANCISCO — California lawmakers overwhelmingly approved a compromise bill Friday night giving Amazon.com a one-year reprieve from having to collect a sales tax from its customers in the state.

Under the new measure, Amazon agreed to start collecting the tax in September 2012 unless there was federal legislation on the issue. Senator Richard J. Durbin, a Democrat from Illinois, has proposed a national law requiring e-commerce companies to collect sales tax, but it has not gained much traction.

Legislatures around the country, supported by struggling bricks-and-mortar stores, have been seizing on the sales tax issue as a means of raising much-needed funds. Amazon is fighting in the courts against a New York law compelling it to collect taxes, and has used the prospect of either opening or closing warehouses as a bargaining chip in negotiations with Texas and South Carolina.

The deal with California might embolden other states, said Robert W. Wood, a tax lawyer here. “Other states needing money will look and say, ‘It wasn’t a smooth process, but California is going to come out ahead,’ ” Mr. Wood said.

California lawmakers spent much of the summer trying to compel Amazon to collect the tax, but the Seattle-based retailer aggressively resisted, spending $5 million to gather a half-million signatures to take the matter to voters in a referendum next June.

The battle pitted Democrats and the California Retailers Association against Amazon and Republicans, who called attempts to collect the tax a tax increase. Consumers are supposed to pay a use tax on material they buy online, but few do.

Under the deal, the referendum will now be dropped. Amazon called the new measure “win-win legislation” that would allow it “to bring thousands of jobs and hundreds of millions of investment dollars to California.”

Lawmakers had hoped to collect $200 million in taxes from Amazon and other online retailers for the current state budget. That money will now have to be found elsewhere. Nevertheless, the legislators said they were pleased.

Loni Hancock, a Democratic state senator from Berkeley, said: “We would have liked them to begin collecting the tax already, but this is a positive step forward.” She mentioned another benefit: avoiding a noisy referendum campaign that the state could easily have lost.

Left unmentioned by either side was the possibility that Amazon might be trying to buy some time. If it moves several small subsidiaries out of the state, it could argue that it no longer has the physical presence in California that requires it to collect the tax.

The measure now goes to Gov. Jerry Brown, who has not spoken publicly about the issue. The vote occurred Friday night, with only a few dissenters in either chamber.

Article source: http://feeds.nytimes.com/click.phdo?i=23dbee2842b10a3fa3479df58a080ca8

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Amazon Pushes Hard to Kill a California Sales Tax

September 5, 2011 by Leave a Comment

Amazon.com, the Seattle-based retailer that is the state’s chief target, is fighting back with all the resources of a company whose stock market valuation is nearly $100 billion. In an unusual move that opponents say is a violation of the state constitution, Amazon is taking directly to voters its argument that it should not be required to collect sales tax.

Infuriated state lawmakers are responding with what some observers are calling “the nuclear option”: writing new legislation that goes after Amazon and other online retailers under an “urgency” clause. If they can get the new measure passed by a two-thirds vote before the end of the legislative session on Friday, it will trump Amazon’s efforts toward a voter referendum.

To sway a few legislators, Amazon is making a counterproposal: if California drops the tax issue for a few years, the retailer says it will build two warehouses in the state and hire 7,000 workers. In a state with 12 percent unemployment, that might seem an attractive offer.

“This is a game of chess with ultimately billions of tax revenues at stake across the country and strong competing values on either side,” said Tracy Westen, chief executive of the Center for Governmental Studies, a Los Angeles research group. “High drama for policy wonks.”

At its heart, the standoff between Amazon and California is simple: the state passed a law at the beginning of the summer requiring online retailers with a physical presence in the state to collect sales taxes. Amazon denies that its subsidiaries in the state, which include a unit that designed the Kindle, constitute such a presence.

The stakes go far beyond the $200 million the state is hoping to get from Amazon and other online retailers, money it has already put into its new budget. (Local communities stand to reap an additional $100 million.) Amazon fears that a defeat in California will sway legislators across the country, and that it will lose a critical pricing advantage. It is fighting a similar measure in New York in the courts.

Opposing Amazon are traditional retailers as big as Wal-Mart and as small as the neighborhood bookstore — the few that are left. “Amazon is killing our business in bricks-and-mortar stores,” said Bill Dombrowski, head of the California Retailers Association, which was the driving force behind the original law.

Amazon easily collected the half-million signatures necessary to put the issue on ballots next June. Since people will in essence be voting on whether to pay an additional 8 or 9 percent when they buy online, Amazon could easily triumph among voters who are watching their wallets. Democrats in the Legislature responded with an urgency bill, a rare tactic used only a few times a year.

“We’re not doing this lightly,” said State Senator Loni Hancock, a Berkeley Democrat. “But it seems like Amazon doesn’t really care about the State of California or the people whose lives are affected by whether or not we have enough money for schools and roads and to keep the libraries and parks open.”

Any Californian who buys a book or a DVD player from Amazon is supposed to pay a use tax when filing state taxes. In practice, however, few do. For years, the issue has been simmering. Then came the withering recession, and the economic calculus changed.

In the two months since the law took effect, Amazon has declined to start collecting sales tax in California. Once it submits the signatures for the referendum and they are verified, the law will be suspended until the vote.

Senator Hancock and other Democrats say they have stopped shopping at Amazon. “This is getting pretty acrimonious,” said the California treasurer, Bill Lockyer, who said he was also boycotting the retailer. “It’s snarly.”

Article source: http://feeds.nytimes.com/click.phdo?i=e02908818121f95b3edbc1a36a1d947e

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