This week we cover the allegations in the multi-district litigation In re: Aluminum Warehousing Antitrust Litigation, 1:13-md-02481-KBF (SDNY) (“In re Aluminum Antitrust Litigation”). We will leave a discussion of the subsequent motion to dismiss briefing and decision, and the appeals to a later date. In short, the Plaintiffs in In re Aluminum Antitrust Litigation allege that Defendants created a monopolistic restraint on the supply of primary aluminum, first by using a minimum per-warehouse distribution rule to monopolize market share, and then converting that minimum warehouse distribution rule into a maximum, creating delays in the distribution of Aluminum and an increase in price, despite the existence of a high market supply of primary aluminum.
Overview of the Aluminum Market
Aluminum, a very abundant metal, is used in a number of industrial products including airplanes and automobiles, packaging materials, construction materials, and consumer electronics. Primary aluminum refers to aluminum produced directly from mined ore. Large integrated producers create primary aluminum and sell to two broad categories of customers: manufacturers/processors/brokers in the physical market and traders/speculators in the resale market. After creation of primary aluminum, the supply is often warehoused.
According to Plaintiffs, demand for primary aluminum is relatively inelastic as aluminum is not readily replaceable with other metals in its various uses, regardless of price increases. Likewise, supply is also inelastic as the cost structures of smelters make it the case that they either produce at full capacity or not at all. The combination of these two market realities make it difficult for aluminum purchasers and manufacturers to fight back against price increases.
Nearly all industrial contracts for the physical delivery of primary aluminum express the price of aluminum using a formula with at least two standardized components: (1) the LME Settlement Price, the cash offered price at the end of the LME’s second morning trading session, and (2) a regional premium (e.g. the Midwest Premium, the Benchmark in the United States), which is meant to cover the cost of delivery to a customer, and which is compiled based on a reporting of the preponderance of physical transactions between buyers and sellers of spot aluminum on a given day for delivery to relevant geographic points. These components are published by private companies, including Platts and Metal Bulletin. From 2008 to 2012, the relationship between global production and demand was relatively stable, with the market tending toward surplus. Directly before the start of the Class Period, the supply of aluminum in the Midwest United States greatly increased, which should have caused the Midwest premium to decrease.
Overview of the Alleged Collusion
According to Plaintiffs, Plaintiffs, a number of first level and direct purchasers of aluminum for physical delivery within the United States, purchased primary aluminum at a price that included the London Metal Exchange (“LME”) Price, and the Midwest Premium or Midwest Transaction Price. Plaintiffs allege that Defendants, LME, Metro, Glencore, Pacorini, among others, and a number of financial institutions including Goldman Sachs and JP Morgan, worked together to unlawfully restrain trade by lengthening the amount of time it takes to load-out aluminum from warehouses, prolonging queues and restraining load-out rates in the market for warehouse services of aluminum in LME registered warehouses in the U.S. and Canada, thus causing an increase in the Midwest Premium, and consequently an increase in the price of primary aluminum.
Plaintiffs allege that in 2003, LME created a minimum rate of load-outs, 1,500 metric tons per day per warehouse location. This favored large warehouses like those held by Metro and Glencore/Pacorini. As a consequence, Metro at the time of the change of the minimum load-out rule announced that it would increase rents to at least three times the competitive rental rates. Simultaneously, regardless of actual capacity and commercial reasonableness, Metro and the other defendants entered into agreements and made the minimum rate of load-outs into a maximum. LME was aware of these limits and complicit in the agreement to use the minimum load-out rule as the maximum rate. Through a web of agreements Metro shared its profits with its co-conspirators, including Burgess-Allen and Glencore. One mechanism used was the illusory cancellation of LME warrants. The Defendants also worked together to shift aluminum among their warehouses in order to concentrate the stock at key warehouse locations.
According to Plaintiffs, LME made increased profits through increased rental revenues. The Goldman Defendants had full knowledge of Metro’s anti-competitive actions and helped facilitate them, especially through using their control of the LME’s rulemaking process to make sure that the minimum rule remained in effect, and lobbying with LME to the same end. The bank defendants made a profit from taking advantage of prevailing market contango, selling short positions on futures and taking advantage of the long positions of the industrial Plaintiffs taken as a hedge against increases in the LME primary aluminum price. The Goldman Defendants also profited through the increased value of aluminum owned by its J. Aron subsidiary. The Goldman, JPMorgan and other Defendants benefited as at the time LME was sold to a Hong-Kong Exchanges & Clearing, and they made a profit off the sale of their shares for a combined $468 million.
Damages
Plaintiffs sought damages, injunctions and declaratory relief under Section 1 and 2 of the Sherman Act, 15 U.S.C. § 1, the Michigan Antitrust Reform Act, MCL §§ 445.773, the Donnelly Act of New York General Business Law § 340, et seq., among other state antitrust and unfair trade practices statutes, and claims for unjust enrichment.
This post was written by Lee J. Rubin.