Traders from specialist commodities firms and, to a lesser extent, banks are buying warehouse in various port cities to store metals for "financing deals". They buy metals from mining companies and sell it for delivery in the future. This trade makes money when the market is in contango, when futures prices are higher than current (spot) prices. The traders only have to ensure that storage costs are less than the profit from the trade.
The London Metals Exchange (LME) restricts how much metal can be shipped on a daily basis. Meanwhile, buyers have to pay storage costs until they can be released. Usually, metals manufacturing companies obtain their metals from producers using fixed long-term contacts. If their business plan projections are too low, then they have to buy more on the market which has much higher prices than the LME.
For example, Pacorini Metals, a unit of commodity trader Glencore, has enough warehouses to store two million tons of aluminum - about 20% of the total stock. Glencore will also buy 15.4 million tons of aluminum over the next seven years from Rusal, a Russian company. There is an inherent conflict of interest that is being managed within the firms "Chinese Walls". These firms have insight into one of the key pricing factors for the commodity, the amount of metals released as dictated by LME rules. This gives them an edge when trading for their own accounts. The LME is conducting a review of its processes. Chief Executive Officer Martin Abbott believes that these warehouses are used primarily for "financing deals" and because the rate of delivery is low or because of the warehouse conflict of interest.
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