MOSCOW The London Metal Exchange should focus on building a warehouse network that reflects key consumption locations rather than adjusting the networks rules, United Co. Rusal chief executive officer Oleg Deripaska said in an interview in Moscow.
The LMEs network of approved warehouses reflects past areas of net consumption, rendering it a poor reflection of customer needs, he said.
"The old LME was about Europe and the United States. The new LME should be about Asia, Southeast Asia and new growth locations. Its actually a waste of time (putting metal in a warehouse) if you need to put another load on a ship to get material from a warehouse to a customer," Deripaska said. "Its not about the old warehousesthere should be incentives to actually adjust warehouse positions to where consumption is. We have consumption in one place, mostly in Asia, and we have warehousing in Europe, where consumption is almost flat."
The LME has been working to establish a network of warehouses in China for years, and the exchanges new owner, Hong Kong Exchanges & Clearing Ltd., is confident it will achieve this long-anticipated goal soon. It also recently approved Kaohsiung, Taiwan, as a delivery location.
The LME has proposed measures to reduce queues to take delivery of metal in some of its approved warehouses. A decision will come in October following an industrywide consultation, with the changes slated to take effect in April 2014.
While stock levels are more than sufficient for current customer needs, the situation will be very different when demand growth picks up and financing deals unwind, making it all the more critical to get the warehouse system right, Deripaska said.
"By 2015, well have a different physical supply and demand picture. Thats because I think aluminum is just very attractive," he said. "The LME warehousing system should provide opportunities to offer deliveries to customers almost on a sort of just-in-time basis, if they need to secure some unbalanced orders through the LME system."
Deripaska also called on the LME to improve transparency to allow for a better understanding of active market participants, and to help prevent the possibility of systemic risk.
"Standardized products in commodity markets have developed so well over the past 15 years, and this has been attracting liquidity, especially in aluminum. Its attracted different types of players, and the market now includes a pure financial play," he said. "Some players are making very risky bets, and transparency will help us to avoid any extraordinary situation that may happen."
Commodity market transparency is on the agenda for the next G-20 meeting in St. Petersburg, Russia, in September, at which the Russian aluminum producer will play a key role.