London, Aug. 9 (Reuters): Lawsuits alleging aluminium price fixing by big banks will shine an uncomfortable light on the role played by the London Metal Exchange, suggesting that the murky world of metal trading is likely to attract more attention from the authorities.
Even if it successfully defends itself from class action lawsuits by aluminium manufacturers, the LME may have to accept greater external oversight into a trade that until now flourished with little external supervision.
The LME, which was sold last year by its member bank owners to the operator of the Hong Kong Stock Exchange, is a defendant in lawsuits, which accuse Goldman Sachs, JP Morgan and Glencore-Xstrata of rigging the aluminium market.
The lawsuits, brought by small aluminium manufacturers in the US, accuse the banks and traders of hoarding metal in warehouses, driving up the prices of industrial products from soft-drink cans to aeroplanes.
Plaintiffs argue that the LME abetted the scam by writing rules that made it possible and ignoring calls to change.
Although the LME insists its rules were made independently, at the time the actions took place Goldman and JP Morgan were its two biggest shareholders, with JP Morgan owning 10.8 per cent and Goldman owning 9.5 per cent.
Goldman and JP Morgan have dismissed the lawsuits against them as without merit. Glencore declined to comment.
Hong Kong Exchanges and Clearing Ltd, the LME’s new owners, also said the lawsuits were without merit and the LME would contest them vigorously.
The lawsuits coincide with a preliminary probe by the US Department of Justice into the metals warehousing industry.
Those who watch the trade say it is no surprise that lawyers have finally been summoned.
“The suits have been a long time coming,” Societe Generale analyst Robin Bhar said.
Since 2010, companies including Goldman, JP Morgan, Glencore-Xstrata and trade house Trafigura have run a lucrative business building up big aluminium stocks, charging rent to store the metal and delivering it only at a limited rate.
The LME’s industrial clients have long blamed the exchange for letting long queues build up for material.
The delays mean extra costs added on to the price of the metal.