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LME rule change won’t hit US premiums: Alcoa

Keywords: Tags  Alcoa, Klaus Kleinfeld, LME, warehouse rules, load-out rates, aluminum premiums, interest rates, inventories aluminum

CHICAGO — Alcoa Inc.’s top executive downplayed the potential impact of proposed changes to load-out policies at London Metal Exchange warehouses and any possible downward effects they might have on regional premiums.

The LME’s proposed rules won’t apply before 2014 and address a problem that Alcoa chairman and chief executive officer Klaus Kleinfeld questioned the necessity of resolving.

"When you look at these so-called inventories that are stuck in the LME, we are really only referring to the canceled warrants," he said.

Canceled warrants account for only about 2 million tonnes of total stocks both in LME warehouses and those stored elsewhere, or "inventories visible and invisible" of approximately 10 million tonnes, Kleinfeld said. "The rest of the metal is moving about freely. I also believe that probably the majority of the metal that is getting canceled is ... going to lower cost off-warrant storage."

Kleinfeld made the comments during a conference call following the release of the Pittsburgh-based aluminum producer’s second-quarter earnings results July 8.

The rules largely apply to Metro International Trade Services LLC’s warehouses in Detroit and Pacorini Metals Vlissingen BV’s stocks in Vlissingen, the Netherlands, he added.

LME warehouses held more than 5.4 million tonnes of aluminum as of July 9, of which more than 1.4 million tonnes were in Detroit and more than 2 million tonnes were in Vlissingen.

Under new exchange proposals, LME warehouse companies will be required to deliver out more metal than they draw in at storage locations with long load-out queues (, July 1).

But Kleinfeld said he was "not exactly sure" what the proposed new LME warehouse policies were attempting to achieve, brushing aside published concerns about metal availability. "I don’t think (metal availability) has even been an issue in the aluminum market," he said. "If there is somebody who hasn’t got metal available ... you can send me an e-mail or give me a call and we’ll solve that."

Some consumers have also used cheap financing to build their own consignment stocks and "have acted as warehouses" themselves, he said.

Alcoa, nonetheless, is studying the proposed changes and will provide its views to the LME, Kleinfeld said. But the goal of any new regulation should be to avoid any "disruptive or sudden impacts" to the market and instead implement the changes "gradually over time," he added.

Kleinfeld also brushed off concerns about premiums falling, saying inventory financing remained attractive given widening contangos on the LME for aluminum and continued low interest rates. Besides, interest rates are unlikely to climb—another factor that could make warehouse deals less attractive—until the economy improves, he added.

And if the economy were to regain its footing, physical demand would also improve, "so I am really not too concerned," Kleinfeld said, noting that both the U.S. and European economies were "recovering slowly with different speeds."

Some market participants expressed concern that warehouse incentives, premiums, spreads and prices could fall and the market could be swamped with metal almost immediately after the new LME policies are revealed (, July 5).

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