Imagine purchasing a new car. The price you negotiate from the dealer is the price you expect to pay, right? How would you feel if you went to buy a new car and, after agreeing on a price, you and the dealer had the following conversation:

“Thanks for buying. We’ve got plenty of cars on the lot right now that are exactly like the one you ordered, but your car will take several weeks or months to arrive from the factory,” says the dealer.

“That seems strange,” you reply. “But I guess I can live with that.”

“One more thing,” the dealer adds. “There’s going to be a charge for delivering it to you and for all the time we had it stored at the factory.”

“Really? You are charging me because you had it in storage?” you ask.

“Yup,” says the dealer. “I know the other dealers don’t do that, but that is how our market works. The charge will be 20 percent of the purchase price… or maybe 25 percent. I’m not sure yet. It depends upon how much demand there is for our cars this week.”

Aluminum Warehouse
Aluminum in a warehouse

At this point, you'd probably take your business elsewhere, but when purchasing the aluminum used in our cans, this is actually how the market works. Unfortunately, the London Metal Exchange (LME) is pretty much the only market for mass buyers of aluminum. The negotiated price is only a vague suggestion of what the final cost will be.  A “premium” is tacked on by the aluminum warehouses, often exceeding 20 percent of the initial price of the aluminum. 

Warehouse owners offer some of the premium as a top-dollar price incentive to aluminum producers to continue manufacturing for a warehouse market, rather than businesses that use aluminum to make soda or beer cans, aluminum window frames or cars and trucks. When aluminum users make a purchase, the final premium is based on the aluminum warehousing game.

Aluminum is the only commodity with such a large premium. With copper it is generally 2 percent. Zinc is just 4 percent. And for other commodities like corn, orange juice or oil, this warehousing game would be unthinkable. 

The LME has taken action to force warehouses with delivery wait times that last longer than 50 days to shift the metal quicker. The wait for aluminum has indeed fallen from a wait of 650 days last fall down to “only” roughly 400 days as of mid-May. These shorter waits at warehouses have resulted in lower premiums. 

However, more needs to be done.

Other exchanges prohibit traders from storing a commodity for the sole purpose of selling it at a later date. That should be the case with LME, too. Trading exchanges are meant to be the place where buyers and sellers agree on a transparent price based on supply and demand. The warehousing game and the premium prevent a clear price from being determined.

William Hovis
William Hovis

The U.S. Commodity Futures Trading Commission (CFTC) and the United States Congress are working with the LME to address this dysfunction in the market. CFTC has also been to working with global regulators to address the warehousing problem. This is a global challenges that requires continued vigilance focused on reforms.

Those of us who buy aluminum are just advocating for fairness and transparency in the marketplace. Dramatic price increases and swings force Coca-Cola and other heavy users of aluminum to pass that cost along to consumers.

There is no reason the purchase of aluminum should be any different from other metals or commodities... or even buying a car.  

William Hovis is chief procurement officer for The Coca-Cola Company's Bottling Investments Group (BIG).