Supply chains require capital. Lots of capital. And the role of a bank is to provide that capital through financing, even though, these days, private lenders are sometimes doing more through Supply Chain Finance platforms (like those offered by Prime Revenue, Oxygen Finance, and Orbian) than the banks are.
However, and in the United States in particular, the role of a bank is not to invest in, and retain the majority control of, companies that control significant stores of commodities that drive the markets that banks run. It’s an indirect route to a price-fixing monopoly, which is a criminal federal offense under section 1 of the Sherman Antitrust Act. It seems that the banks realize this, and, according to this article on CFO.com that states A Bank Is Hiding Inside Your Supply Chain, they’ve found a new way to inflate commodity prices and make extra profit off of your supply chain at your expense.
According to Tim Weiner, Global Risk Manager of Commodities and Metals at MillerCoors LLC, who recently testified at a senate hearing, bank holding companies are slowing the load-out of physical aluminum from warehouses controlled and owned by these U.S. bank holding companies to ensure that they receive increased rent for an extended period of time. According to MillerCoors, they have to wait as long as 18 months for the metal (that is just sitting in a warehouse ready to be used) or pay a high premium in a market where there has been massive oversupply and record production.
And according to the article, and the hearing of the Financial Institutions and Consumer Protection Subcommittee of the Senate Committee on Banking, Housing & Urban Affairs that took place this summer on July 23, 2013, this isn’t the only instance where large U.S. banks have diversified into commodities-markets operations, stretching the limits of rules designed to separate banking and commerce to the point where part of the high prices and price volatility some commodities have experienced is likely due to the banks’ increased involvement in the storage, transportation, and trading of these physical commodities (when they are supposed to stick to the non-physical futures and options markets).
In SI’s view, banks shouldn’t own any business that has any control over a commodity. As the CFO article clearly states, through bank ownership of a commodities business, a financial institution can place its hand on the scale of supply and demand for a commodity and distort the free market. Furthermore, a bank can not only affect the price of the commodity, it can also make profitable bets on its direction in the futures markets. Plus, and this is really scary, a bank that owns a commodities business could choose to deny lending or underwriting to a competitor of that commercial business or even lend at preferential rates to its own commercial commodities business. Thus, SI is in full agreement that regulators need to force banks to be more transparent about their commodities’ operations and divest them where appropriate.
So what does this mean for your supply chain? It means you have to be ever vigilant and know where banks are in, or may be able to take, control in your supply chain and plan appropriately for the disruptive actions to cost or supply that they could take. It means that visibility is key, that transparency from your supply chain partners is more important than ever, and that good record keeping is a must. If banks start to unduly pressure your business, as they are doing to MillerCoors LLC and others, you need to have the data to stand up to them. Price-fixing and manipulation is illegal, and if enough companies stand up to it, it’s a safe bet that something will be done about it (unless the TPP passes. Then all bets are off).