aluminum producers and traders are urging caution as Federal
authorities examine the role of financial institutions in
physical commodity trading and the London Metal Exchange
proposes rule changes on load-out rates.
"Aluminum prices are
about 40 percent below pre-crisis levels and over half of the
producers are losing money or are marginally profitable. Any
rule changes must result in fair pricing and be phased in
gradually over time so as to minimize disruptions to what is
already a very volatile market," a spokeswoman for
Pittsburgh-based Alcoa Inc. said via e-mail July 22.
The LMEs cash
aluminum contract closed the official session July 22 at
$1,794.50 per tonne (81.4 cents per pound), down 15.5 percent
from a 2013 high of $2,123 per tonne (96.3 cents per pound)
recorded Feb. 15.
Some market sources
have argued that high premiums, resulting from metal being tied
up in warehousing queues, have made the difference between
profits and losses at aluminum producers (
amm.com, July 11).
Such reactions come
amid a July 23 Senate committee hearing on the intersection of
banking and commodity trading, as well as a reported U.S.
Commodity Futures Trading Commission (CFTC) investigation on
the issue (
amm.com, July 22), a review by the Federal
Reserve of rules governing banks and their physical commodity
businesses, and proposed new rules by the LME aimed at limiting
long waits for metals at some of its warehouse locations (
amm.com, July 1).
The possible CFTC
probe is a "bank witch hunt," one trader said, contending that
consumers, who have lambasted long waits for metal at LME
warehouses and high premiums, are talking with "forked
"Consumers should have
no problem buying from producers," the trader said.
A CFTC spokesman on
July 22 declined to confirm or comment on the rumored
OCarroll and John F. Ockerman, analysts at Davenport
& Co. LLC, Richmond, Va., criticized the proposed LME rules
as not addressing root causessuch as an aluminum market
in contango, which makes warehousing deals attractive to
investorsand likely to have unintended consequences like
higher premiums. "We believe that the metal in queues, canceled
warrants, is not headed to the physical market but is merely
moving from one stock financing location to another one," the
analysts said in a research note July 22.
Every time a customer
calls looking for metal, a trader owning stocks can choose
either to part with material or, more likely, continue to enter
into financing arrangements. The latter might be more
appealing, assuming higher future aluminum prices, the analysts
said. "Warehouses have not engaged in either illegal behavior
or violated LME rules, though there may be instances of
aggressive actions to increase profitsbut what else is
new in the business of commodity trading?" they asked.
While the legality of
these actions hasnt been questioned, the Federal Reserve
has acknowledged that it is reviewing banks roles in
trading physical commodities. "The Federal Reserve regularly
monitors the commodity activities of supervised firms and is
reviewing the 2003 determination that certain commodity
activities are complementary to financial activities and thus
permissible for bank holding companies," an agency spokesman
told AMM via e-mail.
That 2003 decision
allowed banks to participate in physical commodity markets.
The July 23 Senate
subcommittee hearing will specifically look at the role of
banks in warehouses and other commodity storage sectors.
manufacturers and consumers should not have the price of their
gas, canned food and beverages, or electricity driven up by
Wall Street speculators. When Wall Street banks control the
supply of both commodities and financial products, theres
a potential for anti-competitive behavior and manipulation. It
also exposes these megabanksand the entire financial
systemto undue risk." Sen. Sherrod Brown (D., Ohio) told
AMM July 22. Brown is also chairman of the Senate
banking subcommittee on financial institutions and consumer
protection, which is holding the July 23 hearing aimed at
examining whether banks should control power plants, warehouses
and oil refineries.
Among those expected
to speak are an executive from Chicago-based brewer MillerCoors
LLC and Saule T. Omarova, a professor at the University of
North Carolina at Chapel Hill law school, who has questioned
the role of banks in the commodities sector.
"Large U.S. bank
holding companies ... have since the early 2000s been moving
aggressively into the purely commercial businesses of mining,
processing, transporting, storing and trading a wide range of
vitally important physical commodities. And, equally
surprisingly, it is virtually impossible under the current
system of public disclosure and regulatory reporting to
understand the true nature and scope of these
institutions commodity activities," Omarova wrote in the
abstract to her book "The Merchants of Wall Street: Banking,
Commerc, and Commodities."
Some industry analysts
agree that change is necessary.
Most current aluminum
warehousing business is "not really warehousing in the
traditional sense of the word, but rather a massive financial
trade conducted by companies who have access to cheap money and
who are using metal (and the warehouses they own) as a conduit
through which to lock in returns afforded them by the LME
markets," Edward Meir, analyst at New York-based INTL FCStone
Inc., said in a July 22 research note. "None of this is
illegal, but to the extent that consumers get caught up in this
by waiting months on end for metal or paying higher premiums in
the process ... the system has to be re-evaluated."
New York, contributed to this story.