United Co. Rusal (486), the world’s biggest aluminum producer, urged the London Metal Exchange to postpone suggested rule changes aimed at speeding up withdrawals of warehoused metals.
The current proposal risks distorting the aluminum market further, Moscow-based Rusal said today in a statement. The changes also would reduce transparency and make the LME less relevant for industrial users, it said. The exchange, which monitors more than 700 warehouses worldwide, is consulting market participants on the plan until Sept. 30.
Regulators are scrutinizing the LME’s warehouses after metals consumers including brewer MillerCoors LLC said withdrawal delays distorted prices, even as aluminum stockpiles tracked by the exchange rose to a record this year. At least six lawsuits related to warehousing were filed in the U.S., where the government subpoenaed some companies for documents.
“The intent of HKEx to accelerate the transfer into the market of an additional 2 million tons of aluminum, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to,” Oleg Deripaska, the company’s billionaire chief executive officer, said in the statement. He referred to Hong Kong Exchanges and Clearing Ltd. (388), which bought the LME last year for $2.2 billion.
The LME will refrain from commenting on the proposal until the consultation process is complete, spokeswoman Miriam Heywood said today by e-mail. Alcoa Inc., the biggest U.S. aluminum company, said this month the plan would harm producers without aiding consumers.
The proposed changes would oblige warehouses where withdrawals take more than 100 days to deliver out more metal than they take in. The new rules will take effect April 1 if they’re approved next month by the LME’s board. Aluminum inventories tracked by the exchange were the highest since at least 1979 at 5.49 million metric tons as of July 17.
“HKEx is addressing a poorly justified metal availability issue,” Deripaska said.
Premiums for aluminum paid on top of LME prices fell in the last few months as U.S. lawmakers focused on warehousing. Lower premiums may mean smaller profits for producers and potential shutdowns of output, according to Citigroup Inc. European and North American producers would be most at risk if premiums were to drop further, according to Barclays Plc.
“Producers appear to be against the proposals because of the probability of premiums grinding lower, effectively reducing the margin lifeline to many smelters that high premiums had provided,” David Wilson, an analyst at Citigroup in London, said by e-mail today.
Aluminum stocks monitored by the LME surged almost fivefold in two years through 2009, helped by so-called financing agreements. The accords typically involve buying the lightweight metal for nearby delivery while making a forward sale to capitalize on a market in contango, where prices rise for later deliveries. Borrowing costs, warehouse rents and the size of the contango affect the transactions’ profitability.
“The rule changes won’t increase prompt physical metal availability to consumers,” Wilson said. “Metal will still be tied up in financing deals, particularly with the contango as wide as it is now. You will just see more deals taking place outside the LME at significantly cheaper rental rates.”
Aluminum for delivery in December traded last week at a discount of as much as $130.25 a ton on the LME to the contract for delivery in December 2014, the widest contango since at least 2008. The benchmark contract for delivery in three months fell 13 percent this year to $1,800 a ton.
The LME, the world’s biggest metals marketplace, should add more warehouses and encourage new, independent operators, Rusal said. Pacorini Metals, owned by Baar, Switzerland-based Glencore Xstrata Plc (GLEN), now runs the most warehouses, according to data compiled by Bloomberg. JPMorgan Chase & Co. and Goldman Sachs Group Inc. also have warehousing units.
Rusal also urged the LME to add new aluminum contracts and to adopt disclosure rules at least similar to those used by the U.S. Commodity Futures Trading Commission to aid transparency. Alcoa called for CFTC-like reports and introducing contracts to hedge aluminum premiums.
“The penalty clauses in the proposed warehousing rules would speed up the release of metals into the market, hence may create unnecessary volatility, potentially disrupting the price-discovery mechanism,” Vanessa Lau, an analyst at Sanford C. Bernstein & Co., wrote in a report today. “Even if the proposed rules were applied, it is unlikely that all the contango trades will immediately unwind all at once. Thus, a sudden flood of metals into the market is unlikely.”
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