Banks and trading houses have found a way to beat the ravages of economic downturn, storing millions of tonnes of metal with a business model that outsmarts new rules put in place following widespread concern about their practices.
As of April 1 this year, new London Metal Exchange regulations mandate that warehouses which hold over 900,000 tonnes of metal must release a minimum 3,000 tonnes a day, up from 1,500 previously.
On that date, however, investment bank Goldman Sachs and commodity trader Glencore plan to hike rents for storing aluminium at their respective warehouses in Detroit and Vlissingen, Netherlands by around 10 percent, according to an LME announcement in December.
Detroit, and more recently Vlissingen, have long incited anger from clients forced to pay daily rent for metal stuck in queues of around a year, while the warehouses drip feed their stock out at the lowest possible rate.
The new rules were expected to dent queues. But with warehouses able to hike rents in response, it is little wonder players like JP Morgan want to expand their storage hubs in Rotterdam and Chicago.
"From April you will see there will be a lot more (metal) coming out, this is now compulsory. The compensation for that is a very nice one, because the outcharges and the rents are so much higher," said a warehouse source.
Both Goldman and Glencore declined to comment, or give the latest profit forecast for their warehousing units, though Glencore previously revealed its warehousing unit made a $31-million profit in 2010.
That was in a year when the company had only owned its lucrative LME-listed Vlissingen warehouses for three months, and some industry participants believe warehousing will be a money spinner this year again, despite new LME rules.
"It seems as though the warehousing companies are saying to the LME if you want metal out more quickly you are damaging our business model and we'll have to take action to compensate for that," said Natixis analyst Nic Brown.
Chris Evans, LME head of business development said: "When the discussions of the load out rate were underway last year we said that if we increase the rate there is likely to be an increase in costs and this is what we seeing now."
LME data shows that as of Feb. 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, the warehouses could generate $612,000 a day in rental revenue alone.
An exact figure cannot be calculated because many clients negotiate lower rental rates, but banks remain hungry for more business, with commodities heavywieght Barclays having recently bought a stake in UK-based warehouse Erus Metals.
"Don't feel sorry for the warehouses, they're making huge money and will make even more money now rents have gone up. Doubling the load out rate to 3,000 tonnes a day was woefully inadequate," said an industry source.
Consumer loss Such views regularly receive cheer from aluminium consumers, the big losers in warehousing, who find themselves being out-bid by bankers and trading houses when trying to buy metal from producers.
Because the business models of bank-owned warehouses are built on getting in as much metal as they can for as long as possible, they have to pay incentives to attract metal in.
This incentive in turn pushes up the premium a consumer must pay a producer in order for them not to deliver metal to a warehouse. The bizarre market dynamic has prompted some to question the LME's purported role as a market of last resort.
"It's a market of first resort and its brought the LME into disrepute," said the industry source. "What's the point of having a prompt date when you can't get the metal out till 2013?"
Premiums for western duty-paid aluminium on the spot market in Rotterdam are at around $165-190 a tonne , almost triple the $40-60 premium for Grade A copper - a metal which unlike aluminium, is in chronic short supply and which should, all things being equal, be drawing in a much higher premium.
All things are not equal, however, not in the aluminium market. Global consumption might be less than production, but global demand from banks and trading houses more than makes up the difference.
"There's a real supply chain threat to the business, metal is available (it's) just not accessible," said Nick Madden, chief procurement officer for Atlanta-based Novelis, the world's biggest maker of rolled aluminium products.
"The warehouses continue to offer incentives, which we firmly believe props up the premium."
But the last word from Britain's Office of Fair Trading was that it will not investigate activities of large dealers in LME warehouses, while the LME for its part holds it cannot intervene in a free marketplace.
At a recent briefing, LME Chief Executive Martin Abbott said: "It's not our job to change the market, it's our job to reflect the market and fact that there are queues is an accurate reflection of too much cheap money chasing hard commodities."