Last week I wrote about the gold warehouses associated with the CME’s
kilo futures contract. Today I’ll have look at the Comex New York
warehouses but rather than focusing on the eligible/registered debate, which
has been done to death, I want to look at the fight between the warehouses
for storage customers and the entrance of JP Morgan into this $30 million per
annum business in early 2011 (hence my tacky topical title).
The stacked area chart below shows Comex gold stocks by warehouse. It
shows the build up from 3 million ounces to nearly 12 million ounces during
gold bull market and then a fall, similar to what we have seen with ETF
stocks. The point marked (1) is the entrance of JP Morgan into the vaulting
business in March 2011 and their impact on the other two major warehousers,
HSBC and Scotia.
A better sense of the impact of JP Morgan’s entrance into this business
can be seen in a percentage stacked area chart, see below.
Before JP Morgan’s arrival, HSBC and Scotia had over 90% of the market but
this chart shows clearly that JP Morgan quickly cut HSBC’s market share from
50% to 35% and also into Scotia’s as well. During 2013 HSBC fought back and
regained market share, initially from JP Morgan but then in 2015 eating into
Scotia’s business.
The storage market dynamics are a bit difference in silver, with total
silver stocks being somewhat consistent around 100 to 120 million ounces during
the bull market and in contrast to gold, showing a ramp up to 180 million
ounces as silver has fallen.
The storage business is also more competitive, with Brink’s and Delaware
having larger roles and market share being spread out. Again we see the
impact of JP Morgan, although it took until mid 2012 before they gained
business. CNT also entered the market in late 2012.
From a market share point of view, it would appear that JP Morgan and CNT
together have mostly taken business away from HSBC and Scotia and been able
to maintain it.
While both the gold and silver warehousing market seems quite dynamic and
competitive, it is interesting that the players don’t compete on price, with
all of them charging according to CME $15 per 100oz gold contract per month
and $8.50 per 1000oz silver bar per month (excepting CNT, who charges $6.75).
At current metal prices that $15 fee equates to 0.17% per annum and for
silver the rates are around 0.75%.
In addition, those fees also have not changed at least since June 2014,
which is as far back as the Wayback Machine recorded the fee file. No one
charges a Delivery In fee (which makes sense, you don’t want to dissuade
people from putting metal in), but Delivery Out fees do vary, indicating some
competition for those clients who do use Comex to source physical.
The lack of price competition is unusual in what is not an insignificant
market. The table below shows the total estimated storage fees earned from
2011 to today.
Given that vaulting has large fixed costs, every additional ounces
stored generally represents clear profit – the marginal cost of additional
ounces stored is close to zero. With that set up one would expect more
jockeying on storage fees.
The big loser in the warehouse wars has been Scotia, who had 32% of the
$30 million per year storage revenue on offer during 2011, falling to 14% in
2015 ($4 million worth). The winners were CNT which moved from zero to 8% and
JP Morgan who currently sit at 24%, equivalent to $7 million.
