London Metal Exchange rules allow warehouse companies to release only a fraction of their inventories per day, much less than is regularly taken in for storage, creating long queues to get metal out and guaranteeing rental income.
JP Morgan's aim is to fill its Henry Bath warehousing arm with inventory in the two port cities large enough to rival trading house Glencore's Pacorini and U.S. bank Goldman Sachs. The Pacorini and Metro facilities in Vlissingen, Netherlands and Detroit combined are estimated to hold around half of the global London Metal Exchange (LME) aluminium stocks which stand at just under 5 million tonnes.
I have got the inside information from a very close source that the bank is pursuing a strategy to consolidate warehousing in the two locations to create the next Detroit or Vlissingen. JPMorgan is rebuilding stocks again.
There are complaints from clients about long queues, particularly in Detroit, prompted the LME to raise minimum delivery rates - 3,000 tonnes a day for operators with stocks of over 900,000 tonnes in one city - but traders and analysts say the new rules will make little difference when they come into effect in April-2012
The JPM strategy is likely to inflame consumers and traders already angry about the influence of warehousing companies on the flow of metal.J.P. Morgan is already preparing to store aluminium in Europe's largest port, Rotterdam, where it has over 30 sheds. Nobody would even imagine about it.
JP Morgan, the largest bank by asset side in the United States, was behind the cancellation of 500,000 tonnes of LME aluminium warrants in Vlissingen, just 50 miles away from Rotterdam, on December 21, traders and warehousing sources told Reuters. Cancelled warrants show metal is earmarked for delivery.
They are taking material from producers or traders, or trying to get it out of the market place - they were lucky to get 500,000 tonnes out of Vlissingen and moving it to Rotterdam. I was talking to some senior people at Citigroup who shared further inside that there had been a large number of copper cancelled warrants in St Louis and New Orleans, many carried out by JP Morgan. It wouldn't be a surprise if they wanted to move metal into their own warehouses in Europe or USA. The cancellations don't fit in with the underlying demand picture."
It is unclear how much metal JPM wants to eventually hold in the two locations, but to compete with its two closest rivals, it will require millions of tonnes, most likely aluminium which has the most ideal characteristics for long-term storage deals. Even few traders shared that most of Detroit's 1.4 million tonnes of aluminium stocks, and is ideally located to attract surplus aluminium in North America. There were other signs in recent weeks that the bank's focus has shifted after traders reported JPM sold a large number of warrants, or ownership titles to metal, to release funds. JPM have dumped a large amount of warrants or sold very cheaply. They've let go of a lot of warrants they were holding onto. JP Morgan is manoeuvring into the new commodities business very quickly. Financialization of commodities is in full swing. Happy investing in the industrial metal market
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.