NEW YORK Aluminum market transparency has been a hot
topic in producer circles over the past year, as concerns over
confidence in the London Metal Exchanges price-discovery
processes were raised, Alcoa Inc. chief executive officer Klaus
Kleinfeld told AMM.
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
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.