The LME needs to improve transparency to reflect the changing nature of investors in the market, Kleinfeld said.
"We looked at what other exchanges do, and the standard today is the U.S. (Commodity Futures Trading Commission)s Commitment of Traders reports, which break down between financial and non-financial investor. We have to adapt these standards sooner rather than later to ensure every industry player continues to have comfort in how the price is found," Kleinfeld said.
The LME should provide the same quality of information and level of transparency that is required by other commodities exchanges, such as those falling under the scope of the CFTC, to clarify the impact of financial investors on metals prices, Pittsburgh-based Alcoa said in a letter dated July 23 and submitted to the Senate subcommittee of the U.S. Banking, Housing and Urban Affairs committee on July 25 (amm.com, July 25).
Alcoa has been debating the matter with the LME for more than a year, initially raising questions over transparency as a result of what it deemed to be the substantial increase in financial investors trading on the exchange.
"This phenomenon has changed the price discovery in our marketplace in a very foundational way, but the LME hasnt changed its reporting to reflect this. Its enormously important that to continue to have confidence in the price discovery process, the market has the best transparency that is possible," Alcoa chief executive officer Klaus Kleinfeld told AMM.
The growth of financing deals has added a new dynamic to the market, adding a subset of demand for aluminum that competes with producers in their dealings with consumers, Kleinfeld said.
"People often fail to distinguish between the two types of financial players that are in the marketsthe first are the short-term, higher risk traders on the LME, and the second are the medium to long-term risk-averse traders buying metal and putting it into warehouses, using a low interest rate environment to buy into an asset class called aluminum. The latter is a very different motive to those trading on the exchange," he added.
Regional premiums have risen as financing deals have taken off, while the physical market has tightened due to queues in accessing material from warehouses, he noted.
"But if a consumer is looking for metal and cant get it from a warehouse, I again reiterate: reach out to us; were willing and able to deliver metal. Obviously they have to pay the worlds market price," he said.
There has been a huge focus on high premiums for physical material, but this is slightly misleading. According to Kleinfeld, around 90 percent of the total aluminum price is determined by the LME and the remaining 10 percent is determined by regional premiums.
"Any discussion that focuses only on the 10 percent misses the major point," he said.
But while "the price is whatever develops at the exchange," there is a split between "financial investors with no interest in holding a physical piece of aluminum, and those consumers that need a physical piece of aluminum," Kleinfeld said.
"In the end, someone that needs physical metal needs to have it delivered somewhere; its very different from someone holding a paper and can go short on a paper for a long time. This is one of the reasons why we need transparency, because it would explain that the majority of people that are trading these days are not the ones that are interested in the physical metal," he added.