Overview
In an 85-page ruling today, Judge Forrest dismissed a group of cases alleging that trading firms and warehouse operators conspired to increase the price of aluminum. The opinion states that the motion consisted of more than 2,600 pages of material, and refers to the fact that the parties delivered a tutorial to Judge Forrest on the workings of the aluminum trading market. The ruling was primarily based on the fact that the allegations amounted to parallel, rational market behavior, not a conspiracy:
The complaints allege, and on this motion the Court accepts as true, that between 2009 and 2012 . . . , inefficiencies developed in aluminum pricing. Traders became the primary purchasers of LME [London Metal Exchange] warrants and futures contracts for aluminum. LME stored aluminum in the Detroit area determines the level of the Midwest Premium [a component of the price of aluminum]. As trader rather than user dynamics took root in the LME warehouses, the level of the Premium became driven by trading dynamics rather than actual supply and demand of aluminum users. These dynamics included the arbitrage opportunity presented by decreased demand due to the severe market downturn, followed by the expectation of higher prices in the future. This “buy low now to sell higher later” view of LME traded aluminum is alleged to have led defendants to take actions designed to maximize their profits—including obtaining and retaining large inventories of aluminum traded by warrants and futures contracts (the plaintiffs do not allege that any defendant was a user of aluminum), and creating load-out queues and delays. A direct result of this was to increase storage duration, thus storage costs, thereby increasing the Midwest Premium. The economics of this arbitrage opportunity as alleged by plaintiffs are self evident. That warehouses which make money from storage found longer storage durations desirable is only sensible. Why, indeed, would they want anything else? That traders, who would close out of a position to lock in arbitrage profits were benefitted by holding to a temporal point when such opportunity was maximized, is also self-evident. But why traders or warehouse operators would care to, or want to, increase the Midwest Premium which impacts contractual prices users might pay, is not at all clear. That the combined actions of traders and warehouses to maximize their profits negatively impacted downstream purchasers through a rise in the Midwest Premium is clear—but as cast in the complaints, this was an unintended consequence of rational profit maximizing behavior rather than the product of conspiratorial design.
