NEW YORK The U.S. Department of Justice has started a preliminary probe into the metals warehousing industry following complaints that storage firms owned by Wall Street banks and major traders have inflated prices, sources familiar with the matter said.
The DOJ has sent letters to at least two companies that own warehouses seeking more information about practices that industrial users allege have led to supply shortages and billions of dollars in extra costs, two sources familiar with the letter said on Wednesday.
A third source said the DOJ had informed at least one metal consumer of the probe.
The move is a further sign that U.S. regulators are increasing their scrutiny of the controversial and lucrative industry after years of complaints from aluminum users such as Coca-Cola Co (KO.N) and its sheet supplier Novelis Inc. Goldman Sachs (GS.N) this week said its warehousing subsidiary was not driving up prices or violating any laws.
The industry is also facing a possible investigation by the U.S. Commodity Futures Trading Commission, which last week told warehousing firms not to destroy any documents related to their business.
"The DOJ has opened a line of questioning to assess whether it needs to take further action," one of the sources said.
The exact nature of the letters was not immediately clear and there has been no public allegation of any illegal activity. It is not clear how advanced or broad the DOJ probe is, nor any certainty that it will result in formal charges.
The DOJ declined to comment on the preliminary investigation and letter.
Goldman Sachs, JPMorgan Chase & Co (JPM.N), Glencore Xstrata Plc (GLEN.L) and Trafigura AG TRAFGF.UL - all of whom have purchased major metals warehouses in the past three years - also declined to comment.
Anti-trust lawyers said the department would only launch an official investigation into the lucrative and controversial industry if it found evidence that warehousing firms had broken anti-trust laws. There has been no such indication.
"I would further expect that it would be a two-pronged inquiry aimed at determining whether there has been collusion and whether there has been monopolistic behavior in geographic markets," said U.S. anti-trust lawyer Robert Bernstein, a partner at New York-based Eaton & Van Winkle LLP, who works on behalf of U.S. copper fabricators.
The initial investigation comes as banks' multibillion-dollar commodity trading operations have come under the political spotlight.
The powerful U.S. Senate banking committee held its first hearing on the issue on Tuesday, when aluminum users represented by MillerCoors LLC said high physical prices have cost the consumers an extra $3 billion a year in expenses.
The Beer Institute, which represents the $250 billion beer industry and over 2,800 breweries, has met with the DOJ and urged them to take action, said a source familiar with the meeting.
On Tuesday, Goldman Sachs rebutted allegations that its warehousing company Metro Trade International has violated laws by shunting metal from warehouse to warehouse.
The warehouses and the London Metal Exchange, which oversees the storage outlets in its network, say the big stockpiles and high physical prices are the result of low interest rates and a market structure known as contango that make it profitable to sell metal forward and store it for months or years at a time.
It is also the byproduct of LME rules which mean warehousing companies only have to deliver out a small tonnages of metal each day. According to current rules, facilities with 900,000 metric tons or more metal have to load out 3,500 metric tons
Under fire from irate users, the LME has proposed a massive overhaul of its warehousing policy that would come into effect next April.
(Reporting by Josephine Mason; Additional reporting by Diane Bartz and David Ingram in Washington; Editing by Jonathan Leff and Ryan Woo)