Aluminum Seen by LME in No Shortage as Buyers Say Costs Rose

The London Metal Exchange, the world’s biggest metals marketplace, said there is no “reported shortage” of aluminum after buyers complained about inflated costs and backlogs at the bourse’s storage network.

Consumers can buy the metal used in cars and beverage cans directly from producers as they always have done, the LME said in a statement e-mailed today, in response to a U.S. Senate subcommittee hearing today on whether banks should own warehouses or oil refineries. The total price of aluminum has fallen 40 percent since July 2008, the LME said. The exchange is legally restricted from limiting rents and can’t prevent trading companies from owning warehouses, it said.

Global aluminum costs were inflated by $3 billion in the past year through LME rules that allow Goldman Sachs Group Inc., JPMorgan Chase & Co. and other warehouse owners to slow deliveries, said a risk executive at brewer MillerCoors LLC. The U.S. Congress should rein in banks’ ability to own and trade raw materials or risk another financial collapse, Joshua Rosner of Graham Fisher & Co. said at the hearing today.

“If banks are forced to sell warehouses, the most likely buyers are entities such as trading houses, hedge funds or non-U.S. regulated banks, which means an increased concentration of the ownership of LME warehousing among a smaller number of players,” David Wilson, an analyst at Citigroup Inc. in London, said by phone today “It will push out the warehousing outside the remit of the U.S. regulators.”

LME Proposal

The LME on July 1 proposed linking delivery of metal from warehouses to metal that can be taken in. Its attempts to ease the backlog didn’t go far enough and fast enough to solve the problem, Tim Weiner, a global risk manager at Chicago-based MillerCoors, said at the hearing.

Goldman Sachs, JPMorgan, Glencore Xstrata Plc and Trafigura Beheer BV bought storage companies in 2010. The practices of warehouse owners authorized to hold metal by the LME created artificial limits on available supply, leaving prices “inflated relative to the massive oversupply and record production,” Weiner said in a written testimony.

The brewers’ concerns are shared by metal buyers including beverage makers Coca-Cola Co. and Dr. Pepper Snapple Group Inc. and manufacturers Novelis Inc. and Ball Corp., Weiner said.

Aluminum for delivery in three months on the LME has fallen 30 percent to $1,845.50 a metric ton in the past two years. Premiums added to aluminum on the LME surged to a record 12 cents to 13 cents a pound in June, almost double from 6.5 cents in the summer of 2010, according to data from Austin, Texas-based researcher Harbor Intelligence.

Aluminum Prices

While aluminum prices are down about 45 percent to $1,800 a ton since July 2008 on the LME, premiums are reportedly higher at $260 a ton from $100 a ton, the LME said.

Backlogs have grown as more metal got tied up in financing deals that typically involve the purchase of metal for nearby delivery and a forward sale to take advantage of a market contango, where prices rise into the future. Aluminum users are sometimes forced to wait more than 18 months for delivery because of “unfair” warehouse practices, Weiner said.

Conditions in commodities markets are “exceptional,” after the financial crisis of 2008-09 and low interest rates and stimulus measures that followed, the LME said.

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