Slipping through the Cracks: Detecting Manipulation in Regional Commodity Markets
Between 2010 and 2014, the regional price of aluminum in the United States (Midwest premium) increased threefold. We argue that the Midwest premium was likely manipulated during this period through the exercise of market power in the aluminum storage market. We first use a difference in differences model to show that there was a statistically significant increase of $0.07 per pound in the regional price of aluminum relative to the regional price of a production complement, copper. We then use several instrumental variables to show that this increase was driven by a single financial company's accumulation of an unprecedented level of aluminum inventories in Detroit. Since this scheme targeted the regional price of aluminum, regulators who monitored only spot and futures prices would not have noticed anything peculiar. We therefore present an algorithm for real time detection of similar manipulation schemes in regional commodity markets. The algorithm confirms the existence of a structural break in the U.S. aluminum market in late 2011. Using the algorithm, regulators could have detected the scheme as early as December 2012, more than six months before it was publicized by an article in The New York Times. We also apply the algorithm to another suspected case of regional price manipulation in the European aluminum market and find a similar break in 2011, suggesting the scheme may have been implemented beyond the United States.