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LME decision may stir price confusion

Mar 27, 2014 | 05:21 PM | Michael Cowden

Tags  London Metal Exchange, LME, warehoue rules, United Kingdom High Court, Rusal, aluminum prices, regional premiums, Midwest premium Llloyd O'Carroll


CHICAGO — A decision by the United Kingdom’s High Court of Justice to block new London Metal Exchange warehouse rules could create confusion over the direction of prices and regional premiums and perhaps impede the ability of the exchange to address antitrust concerns in the United States, according to industry analysts.

The market had been expecting the new rules to go into place April 1, an assumption that has been suddenly and unexpectedly proven wrong (amm.com, March 27), the analysts said, noting that it is no longer clear whether or when new rules might be implemented.

The LME announced the warehouse rules last year as it looked to trim inventories at exchange-listed sheds with large inventories, such as those in Detroit and Vlissingen, the Netherlands (amm.com, July 1).

“We’ll have a little chaos until we figure out what’s going on,” Lloyd O’Carroll, managing director of Cleveland-based Northcoast Research Holdings LLC, told AMM. “There were a lot of LME shorts bidding on load-out rules, and no load-out rules means some shorts need to cover.”

In addition, premiums had been expected to continue to move downward, another assumption made by some banks and commodity speculators that has been called into question by the ruling, O’Carroll said. “It’s unclear what’s ultimately going to happen to premiums,” he said. “But certainly some people were caught leaning the wrong way.”

“Alcoa (inc.) has argued in its submission to the London Metal Exchange that its consultation process on proposed warehouse rule changes was unfair,” a company spokeswoman told AMM via e-mail March 27. “Alcoa continues to stand behind its submissions to the LME and encourages the Exchange to approach any proposed changes with complete procedural fairness.”

The High Court’s decision favored Moscow-based aluminum producer United Co. Rusal (UC Rusal), which also claimed that the consultation on the proposed linked load-in load-out rates was unfair.

Pittsburgh-based Alcoa, unlike UC Rusal, did not sue the LME over the issue, although Alcoa chairman and chief executive officer Klaus Kleinfeld has said he “understands where they are coming from” (amm.com, Jan. 10).

Other North American aluminum companies were largely silent on the issue.

A spokesman for Cleveland-based Aleris International Inc. declined to comment on the decision, as did a spokesman for Franklin, Tenn.-based Noranda Aluminum Holding Corp.

Montreal-based Rio Tinto Alcan Inc., Chicago-based Century Aluminum Co. and Atlanta-based Novelis Inc. did not respond to a request for comment.

The decision could also lead to higher prices for the shares of aluminum companies, O’Carroll said.

Shares of U.S.-based aluminum producers, including Alcoa, Century Aluminum and Noranda, were all up more than 5 percent from their previous close in afternoon trading March 27.

The market might reason that premiums will be supported because there is no longer a rule in place to guarantee that the warehouse queues become shorter and because there has been a connection between the length of queues and regional premiums, Timothy Hayes, principal of New York-based Lawrence Capital Management Inc., said. But a jump to see the court’s decision as leading to higher premiums might be short sighted, he cautioned.

That’s because premiums remain near record highs irrespective of the ruling, which makes financing deals too risky for stock financiers, Hayes said. “The premiums are so high right now that if they fall, it could wipe out (stock financiers’) profits,” he said.

That means there will continue to be downward pressure on premiums as stock financiers “move to the sidelines” until premiums move low enough to justify re-entering deals, Hayes said. In the meantime, metal will continue to roll out of financing deals and into the physical marketplace, he said.

The decision might also shoulder the LME with unexpected risks, John Tumazos, principal of Holmdel, N.J.-based John Tumazos Very Independent Research LLC, said. That’s because the exchange might now find itself with no easy way to address concerns about the proposed reforms in the United Kingdom and antitrust lawsuits in the United States, he said.

“The complexity and legal implications are very large. They could be in a situation where what conforms to U.K. practices violates U.S. antitrust law or vice versa,” he said.

A host of antitrust lawsuits were filed last year on behalf of dozens of U.S. aluminum consumers, such as beverage can producers and extruders, which accused big banks, warehousing companies and the LME of conspiring to reduce aluminum availability and increase aluminum prices and premiums by manipulating warehouse inventories (amm.com, Dec. 17).

Those “beer drinker vs. Goldman” lawsuits could be a big deal if the banks and the LME lose and are assessed damages, Tumazos said. But with the High Court’s decision, the exchange might be unable to immediately address the issue of long waits for metal at Detroit-area warehouses, where more than 1.5 million tonnes of metal are stored in LME-listed sheds, he said.

“There is no upside to this. But the downside to the U.S. antitrust law is more,” Tumazos said. “A practical option might be for the LME to move to another jurisdiction. ... It doesn’t have to be the London Metal Exchange, it could be the Barbados Metal Exchange,” he said.




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