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US, UK should halt LME rule changes: Alcoa

Oct 21, 2013 | 05:13 PM | Michael Cowden

Tags  Alcoa, London Metal Exchange, LME, warehouse rules, regional premiums, Midwest premium, aluminum prices, CFTC FCA

CHICAGO — Alcoa Inc. is calling on U.S. and U.K. regulators to block proposed changes to London Metal Exchange warehouse policies, contending the rules are unfair and opaque.

Potential changes to warehouse load-in/load-out requirements, aimed at reducing long lines for metal and historically high regional premiums (, July 1), are "irreparably flawed," and any "imminent" plans to put them in place should be suspended, the Pittsburgh-based aluminum producer said in Oct. 18 letters to the U.S. Commodity Futures Trading Commission (CFTC) and the U.K.’s Financial Conduct Authority (FCA).

Before making any changes, the LME should conduct and publish a cost-benefit analysis, address the lack of effective hedging mechanisms for regional premiums and then begin a new consultation process, the company said.

"Regardless of whether the proposal has any actual impact on prices, the LME’s action has caused a great deal of turmoil and confusion that is inconsistent with a well-functioning market," Alcoa said. "Implementing the proposal would only compound the damage and would set a precedent whereby market users must expect that metal prices will be determined not only by supply and demand but also by LME policy."

An LME spokeswoman declined to comment Oct. 21 on Alcoa’s letter. Any response won’t come until after an expected exchange board meeting in late October, she said.

The LME is "ill-positioned to play the role of a price regulator" and should not look to influence regional premiums, especially given potential side-effects such as "artificial backwardations" and incentivizing more metal to move to non-LME warehouses, where reliable inventory data is not widely available, Alcoa said.

Aluminum prices are generally based on the LME price plus a regional premium, with the latter representing only 3 percent of the physical price of aluminum before the 2008 financial crisis. The Midwest premium rose to 12 percent of the metal’s price earlier this year before falling to 10 percent recently, Alcoa said.

The LME might be seeking to reduce regional premiums, from which the exchange receives no revenue, to maintain the prominence of the LME component of aluminum pricing, from which it does earn money from trading fees, Alcoa alleged. "The LME has taken this approach rather than creating exchange-traded regional contracts that would allow market participants to hedge premium risk effectively."

Alcoa’s business model is based on exposure to aluminum prices and doesn’t include significant hedging of price movements, it said, also accusing the LME of engaging in private consultations with a limited group of exchange users before announcing the proposed rules. Alcoa also questioned whether those parties might have a financial interest in the LME adopting new regulations.

Alcoa has previously criticized the proposed changes (, Oct. 9), along with other aluminum producers such as Atlanta-based Novelis Inc. and Russia’s United Co. Rusal (, Sept. 18).

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