Big Beer Threatens Commodity Markets, U.S. Industry More Broadly
Some large U.S. multinationals that consume aluminum, particularly the beer industry, will seemingly not rest until the government receives authority to intervene in commodities markets at their behest.
Earlier in the decade, a number of metal extrusion companies filed suits that argued the London Metal Exchange (LME)—the futures exchange that sets global reference prices for metals—was involved in price manipulation, along with Goldman Sachs and several other aluminum traders. A complex antitrust case followed, but the LME was found to have sovereign immunity and the plaintiffs were found to lack standing to complain of direct injury. In fact, prices had actually fallen in the years of alleged manipulation.
Despite failing the last time around, these multinationals have not stopped. Now, they are trying to give the Commodities Futures Trading Commission (CFTC) the power to set aluminum prices.
Introduced at the industry’s behest, the Aluminum Pricing Examination Act, or APEX, would shove markets to the sidelines and give the CFTC “exclusive jurisdiction over the setting of reference prices for aluminum premiums.”
Why are these beverage-makers pushing government intervention? Because they claim there is price manipulation within the aluminum market that costs them millions. But the CFTC itself already monitors the aluminum market closely. The CFTC’s former chairman, J. Christopher Giancarlo, testified before Congress last May. He said the CFTC has been “looking at aluminum for years…but we have not found manipulation within the markets.”
The spot price of aluminum is affected by many factors. Proponents of CFTC intervention are trying to make a case for manipulation on the basis that President Trump’s tariff alone could not have raised the spot price to its current level. But this assertion overlooks other crucial market factors affecting prices, including: a jump in U.S. transportation costs; significant shortages caused by an 18-month lockout of union workers—which slashed one major aluminum supplier’s production by two-thirds; and, sanctions placed on the Russian giant Rusal—the second largest U.S. supplier in 2016 and 2017. None of these occurrences should justify government intervention in the aluminum marketplace.
As things currently stand, companies such as S&P Global Platts already serve as a bulwark against market manipulation. S&P and its competitors operate as independent reporters of aluminum prices, offering unbiased and transparent information to serve as reference points for price negotiations. Those reports on the value of aluminum actively prevent the type of manipulation that the beer lobby is supposedly concerned about.
In reality, breweries are urging the bill’s passage for one reason: profit. Indeed, the APEX Act will pad breweries’ bottom lines—but at the expense of the aluminum industry and the health of the U.S. economy. By keeping aluminum prices artificially low, the APEX Act will ensure that breweries pay less for their metal cans. After all, 64 percent of beer made in the United States last year was sold in cans—an increase from 56 percent a decade prior. But more importantly, it forces the metalworking industry to accept below-market rates for their products—precisely what they were forced to endure under the policies of previous administrations.
Commodities markets can be complex. In the case of aluminum, there is one market where there occur purchases of aluminum directly from producers by industrial consumers. And there is another market involving contracts for stored aluminum that allow for hedging, trading, and other financial goals. Regardless of the complexity, supply and demand still drive both markets.
If the beer lobby sets a successful precedent with the APEX Act, and the CFTC invades the market for one commodity, what’s to stop it from continuing into others when the next interest group cries foul? It’s a dangerous game—and one whose potential repercussions extend far beyond the beverage and aluminum industries.
There are better ways to get at the perceived problem of market misfunction: further reform of LME warehousing practices, greater transparency in the setting of the so-called Midwest Premium price for aluminum, and removal of the Federal Reserve exemption that allows investment banks to be involved in commodities.
The APEX Act is the wrong vehicle to generate whatever changes might be needed. It would enshrine government meddling in financial markets and endanger the existence of American aluminum companies and their workers. The APEX Act is a particularly bad idea and must be defeated.