The London Metal Exchange postponed the implementation of a new warehousing rule after a U.K. judge said its decision was “unfair and unlawful” in a lawsuit brought by United Co. Rusal.
Judge Stephen Phillips overturned the rule and ordered a review of the LME consultation in a written judgment handed down in Manchester, England today. One part of warehousing changes scheduled to begin on April 1 now won’t be implemented because of the judgment, the LME said in an e-mailed statement.
The world’s biggest industrial metals exchange altered its rules in an effort to shorten times for withdrawing metals from warehouses amid complaints about delays leading to higher costs for consumers. The U.S. Commodity Futures Trading Commission is investigating warehouse operators’ practices.
“It’s a huge surprise,” said Nic Brown, head of commodities research at Natixis SA in London. “This is something the LME desperately needed to do to restore some credibility to the aluminum market. This will result in the very, very least a delay before the rules can be implemented.”
Rusal, the largest producer of aluminum, said in the lawsuit that the LME didn’t properly examine alternatives to the changes, which it said would cause tens of millions of pounds in losses.
Rusal Chief Executive Officer Oleg Deripaska said the company would work with the LME “to ensure that the revised consultation period and subsequent rule changes serve to increase the integrity of price discovery and transparency across the market.”
The LME said it was disappointed by the ruling.
“The court found in favor of Rusal on one specific procedural issue, that the consultation should have encompassed or made reference to the option of banning or capping rent in queues,” the LME said in the statement.
The judge agreed with Rusal’s argument that the exchange should have considered capping rents charged by warehouses with lengthy waits.
“The LME cannot set rents because of clear competition issues,” David Wilson, an analyst at Citigroup Inc., said in a phone interview. “The judge is almost saying, ‘we want you to look at the option that appears to contradict competition rules.’ Uncertainty on rules is not good for the market.”
The LME, which licenses about 700 warehouses worldwide, said in November it would require storage operators where withdrawals took more than 50 calendar days to ship out more metal than they take in, as part of package of warehousing reforms.
The bourse is seeking legal advice on options including appeal or “re-consultation” after the ruling. The exchange may still implement the rule as the result of a new market consultation, the LME said in a notice to members today.
The warehouse logistical and legal reviews, the LME’s enhanced powers to address artificial backlog, warehouse data publication, commitment of traders report, works on a premium hedging contract and other measures will still be implemented next week, the LME said. The bourse will also continue with introducing a separate delivery requirement for steel.