Goldman and JPMorgan enter metal warehousing

As piles of base metals from aluminium to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing. The deals reflect banks' appetite for exposure to physical commodities beyond traditional commodities derivatives.

Stockpiles at London Metal Exchange's registered depots surge to an all-time high of 6m tonnes – up from 1m in 2007. Traders and bankers say warehousing is a classic "anti-cyclical" business as it flourishes when demand for metals is lacklustre and stockpiles mount.

"The business is booming right now," says a commodities banker in London.

The current prosperous period contrasts with much of the 2000-2008 cycle, when strong economic growth and metals consumption reduced LME inventories to near-record lows, sharply cutting warehouses' income.

Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME's registered stocks are held. The LME is the world's largest metal exchange.

Goldman Sachs last week bought US-based Metro International in a deal that rival bankers and warehouse executives valued at about $550m. The bank declined to comment on the amount but said: "The company will continue to operate independently, keeping its name and headquarters in Detroit and [it] will be run by the existing management team."

Last month JPMorgan acquired UK-based Henry Bath as part of a deal to buy a large chunk of the RBS Sempra Commodities business for $1.7bn.

Swiss-based oil and metals trader Trafigura this week said it had bought UK-based warehouse company NEMS Ltd for an undisclosed sum. Pierre Lorinet, Trafigura chief financial officer, said the acquisition reflected the trader's "commitment to ongoing investment in logistics and warehousing within the metals" sector. "NEMS will continue as an independent operation," he added.

The deals will leave Rotterdam-based C. Steinweg and Pacorini, based in Trieste in Italy, as the only two big independent warehouses. In addition, Singapore-based CWT Commodities is a medium-size operator in the sector, with a strong network in Asia.

Industry executives and bankers say Goldman Sachs and JPMorgan paid handsomely for their warehouses. "They are buying at the top of the market," one executive said, referring to the current mountain of metal being stockpiled.

But traders say the banks are likely to make substantial profits. With so much metal in depots, warehouses will earn rental fees for months. Fees are poised to rise by about 5 per cent on average in April, LME data suggests. Goldman Sach and JPMorgan will be paid a so-called "free-on-truck" fee when metal starts to move out of depots, increasing profits.

Chief users of warehouses services are mining companies and traders such as Glencore, Gerald Metals or Noble, and physical hedge funds such as Red Kite.