With LME warehouse revamp plan derailed, aluminium gains

A UK court ruling halting the London Metal Exchange’s plans to reduce the logjams in warehouses is pushing up aluminium prices globally.

The metal, used for making cans to aircraft parts, gained 3.70 per cent last week with prices rising nearly nine per cent in a month. Last week’s gains were the third in a row after the court’s order on a petition from Russian aluminium maker Rusal.

(Russia accounts for 12 per cent of aluminium produced globally. About 80 per cent of the production is exported with last year’s shipments being 3.36 million tonnes.)

The London High Court struck the LME’s warehousing reform process because it found that “consultations had been unfair and unlawful”.

Rusal petitioned the court fearing that prices of its products will suffer from the exchange’s plans to make owners of warehouses in its network deliver metals more quickly to users. It also pleaded its case on the grounds of human rights, the right to peaceful enjoyment of its possessions.

The Russian firm contended that the new rules on warehousing threatened to worsen supply shortfall and will help increase premiums that buyers have to pay in addition to LME cash price for immediate supply.

The LME planned to force warehouses which took a longer time to make deliveries to ship out more metal than they store each day.

This, it was feared, would lead to supply shortage as stocks would move to some unofficial warehouse, leading to a longer waiting period for metal delivery.

Currently, it takes 392 days to get aluminium from Motown warehouse in Detroit, the US, and 511 days from Vlissingen in the Netherlands. The queue has got longer since the court’s order. Two weeks ago, delivery of 3.60 lakh tonnes was cancelled.

Rusal says that the LME price should just be a benchmark. Regulations would only make the market opaque with removal of stocks from the warehouses.

The exchange has been forced to go in for reform following complaints from users to the US regulators. The LME wanted to make it mandatory for warehouses which take over 50 days for delivery, to ship out more than they store.

Premiums have soared to record highs partly due to the queues and traders fear they could climb further following the ruling. LME aluminium prices have dropped 40 per cent since touching a peak of $2,800 a tonne three years ago. Earlier this year, prices ruled below $1,800, a range that will not help producers to recover their costs.

On Monday, aluminium was quoted at $1,884 for delivery in July. The LME is now taking legal advice on its options, including making an appeal or restarting the consultation.

Banks and traders who own warehouses and charge rent have profited from building long queues to withdraw the metal. Some also keep huge inventories of aluminium tied up, making them unavailable to manufacturers, in long-term financing deals. This situation leads to the cost rising for getting the physical metal despite the fact that global stocks are ample.

In its effort to set right the situation, the LME last year came up with plans to implement reforms, including a cut in the maximum queues. To implement its plans, the exchange consulted the stakeholders on a “load-in load-out” rule that the court has now found fault with.

Aluminium buyers have long been complaining about having to wait for over a year to get hold of stocks from warehouses at key locations, including Motown and Vlissingen.

Producers, on the other hand, are worried that a glut of metal that will be released from warehouses would further erode their bottomline.

The exchange, however, will be going ahead with other reforms, including review of logistics, a new physical markets committee and position data. The exchange has been given additional powers to crack down on market abuse besides reviewing its agreement with warehouse owners. These have been found in order by the court.

The global price has not had much of an effect in the domestic prices. On MCX, May contracts have increased to ₹114.20 a kg from ₹108 a month ago. However, since metal prices are fixed on a fortnightly basis based on LME prices, there could be some rise from the next fortnight.

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