In new warehousing suit, Goldman, JPMorgan sued over zinc

NEW YORK Fri May 23, 2014 11:13pm EDT

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013. REUTERS/Brendan McDermid

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Wall Street banks, big metal merchants and the London Metal Exchange face a lawsuit alleging they have artificially inflated zinc prices, expanding a high-profile legal case that has until now centered on the larger aluminum market.

In a filing on Friday, Duncan Galvanizing, one of the oldest galvanizers in the United States, accused Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N), the LME and metal warehouse operators of conspiring since 2010 to manipulate the U.S. zinc price.

The suit, registered in the Southern District of New York, is the first to include allegations over the impact of warehousing on the smaller, niche zinc market. Zinc is used to coat steel to protect against corrosion.

The lawsuit names as defendants the mining and commodities trading group Glencore Xstrata (GLEN.L) and its Pacorini Metals USA LLC unit. Metro International Trade Services, the metal warehousing of Goldman Sachs, is also named a defendant.

The lawsuit, which seeks class action status, echoes the allegations made in 26 suits that have been consolidated into a class-action suits over alleged price fixing of the aluminum market in the United States.

JPMorgan and Glencore declined to comment on the lawsuit. A spokesman for Goldman Sachs said it intended to "vigorously contest the suit."

LME did not respond to a request for comment.

Frustration over long waiting times and inflated prices at metals warehouses across the world has led to growing criticism of banks that own commodity assets and trade raw materials and has captured regulatory and public attention in the United States.

Complaints about escalating costs of aluminum by major users like Coca Cola and MillersCoors which use the metal to make beverage cans have caught public and political attention, but long queues and inflated prices have been a big problem across other base metals, market participants say.

The lawsuit claims the defendants used a variety of means to restrain trade in zinc, including by manipulating LME rules to ensure long queues for metals and shuttling zinc between warehouses for no reason other than to "cause and exacerbate anticompetitive effects."

Like aluminum, physical prices of zinc have soared in recent years due to the queues, costing endusers billions of extra dollars each year.

Premiums, paid on top of the benchmark LME zinc price for physical delivery, have soared since 2010, Richard Brooks, who owns Duncan Galvanizing, a small family-owned coating company based in Massachusetts, said on Friday.

He pays between 8 and 10 cents per lb for zinc premiums, up from 2-4 cents four years ago before the long wait times appeared.

"If we can stabilize the pricing, it can make the market competitive for us again," said Brooks, whose company coats everything from microchips with gold to bridges with zinc, by phone on Friday.

"I'm a small player and I enjoy being in business. It's not for the reward. It's for what's right."

Most of the ire over zinc queues is centered on LME warehouses in New Orleans, where 80 percent of the zinc in the exchange-registered stockpile is stored. Pacorini operates most of the sheds in that port city.

The lawsuit will likely stir the debate over how to solve the years-long problem over long queues that have plagued the LME for years.

The exchange, the world's biggest and oldest metal exchange, has announced plans for a sweeping overhaul of its storage policy aimed at easing logjams.

Facing political and regulatory pressure for its involvement in physical commodity markets, Goldman Sachs this week put Metro up for sale. JPMorgan is selling its physical commodities business, including its warehousing unit Henry Bath.

The case is Duncan Galvanizing Corp v. The London Metal Exchange, et al, U.S. District Court, Southern District of New York, No. 14-03728.

(Reporting by Andrew Longstreth and Josephine Mason; Editing by Mohammad Zargham & Kim Coghill)