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Exclusive: Goldman explores sale of Metro metals warehouse business

A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010. REUTERS/Brendan McDermid
A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010. REUTERS/Brendan McDermid

By Josephine Mason and David Sheppard

NEW YORK (Reuters) - Goldman Sachs has explored a sale of its metals warehousing business Metro International LLC, three sources with knowledge of the matter told Reuters, just three years after the investment bank bought the firm for $550 million.

Detroit-based Metro has attracted the scrutiny of regulators since Goldman took over the warehouse company in 2010, as companies such as Coca-Cola Co and other big metal consumers have accused it of distorting aluminum supplies. Goldman has consistently said Metro has not broken any laws or rules.

The sources say the bank has been happy with Metro's performance. It has proven to be a lucrative money-spinner as stockpiles of aluminum have mounted in its global warehouse network.

Goldman may still decide to keep Metro, the sources said, but the bank has indicated it is ready to listen to any offers having already earned a sizeable return on its investment in the business.

"The bank would sell for the right price," said one source with direct knowledge of discussions.

It is unclear whether Goldman has reached out to potential buyers. The sources asked not to be named as they are not authorized to speak on the matter.

A spokesman for Goldman Sachs declined to comment when contacted by Reuters.

UNDER PRESSURE

A sale may indicate Goldman is scaling back ambitions in its once-storied commodities trading arm, where revenues have fallen by around 90 percent since 2009 to just $575 million last year, according to the bank's annual report.

After making up 15 percent of the banks' total trading revenues in 2011, commodities fell to just 3 percent last year.

Goldman and Morgan Stanley are also locked in discussions with the Federal Reserve over their right to keep owning and operating physical commodity assets like warehouses, oil storage tanks, and pipelines following their conversion to bank holding companies during the financial crisis.

Under U.S. banking regulations, banks are usually barred from owning physical commodity assets that they operate.

The Fed has given Goldman and Morgan Stanley a five-year grace period - which expires in the fall - while it decides whether their long history of operating in these markets qualifies them for an exemption.

The purchase of Metro in 2010 was led by Goldman's veteran commodities chief Isabelle Ealet, and was designed to increase the bank's presence in physical metals markets so that it would be at the high level the investment bank has long enjoyed in oil.

It was also aimed at offsetting the closure of its proprietary metals derivatives trading desk, which was related to new regulations. But a lack of capital and bureaucracy within the bank have hampered the physical trading team's efforts, market sources have said.

Scott Evans, a senior metals trader hired in 2010 to set up the bank's physical desk in New York, left the bank earlier this month. Another senior physical metals trader, David Freeland, quit the bank's London desk last month to join merchant trader Noble Group.

Ealet was promoted to co-head of the bank's securities business in early 2012. She retains oversight of the commodities business as part of her expanded role.

METRO CITY

Goldman has seen the warehousing business earn it a sizeable return on its initial investment, two of the sources said. Warehousing has turned into a billion-dollar industry in recent years as a weak global economic recovery has curbed metal demand creating excess supplies.

Metro is one of the biggest warehousing companies approved for use by the London Metal Exchange (LME), the world's oldest and largest metals market.

Warehouse firms in the LME system were traditionally independently owned, but since 2010 four of the six largest players have been bought by investment banks or major commodity trading houses like Glencore International Plc and Trafigura .

Under the new owners, the warehouses have paid traders incentives to store their metal in the facilities in long-term rent deals, contributing to a massive increase in stockpiles.

However, this has created major tensions with consumers of the metals. For car makers and beverage can manufacturers, these storage plays have boosted prices for metal critical for their businesses, and have at times left them waiting months to take delivery of the metal.

Critics say much less aluminum is leaving the depots than arriving.

That is partly due to LME rules which stipulate a minimum delivery rate for metals stored in the warehouses it monitors. Warehouses do not have to ship out any more than that amount.

For its part, Metro has built up a stockpile in its 29 Detroit warehouses of some 1.4 million metric tons (1.5 million tons) of aluminum. That is more than a quarter of the aluminum in LME-registered warehouses around the world and 3 percent of annual global demand.

The firm also operates another 49 warehouses spread around the United States, as well as facilities in Italy, Turkey, South Korea, and Malaysia. In total, it has about 120 warehouses globally, according to LME data.

(Reporting by Josephine Mason and David Sheppard; Additional reporting by Greg Roumeliotis; Editing by Martin Howell and Tim Dobbyn)

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