GENEVA Aluminum industry executives have called for greater transparency in London Metal Exchange price-setting mechanisms, with one asking whether the exchange had turned into a casino.
"Is the LME there for price setting or has it become a gambling house?" said Vladislav Soloviev, first deputy chief executive officer of Russias United Co. Rusal.
Speculators have become a key part of LME trading, and their influence means metal prices arent truly reflecting supply and demand, he said at AMM sister publication Metal Bulletins 28th International Aluminium Conference in Geneva.
"There is no transparencythis is the issue that has to be addressed," Soloviev said, calling for the publication of data similar to the U.S. Commodity Futures Trading Commissions Commitments of Traders report.
The lack of transparency is "hard to explain to customers because there are doubts over the (price-setting) mechanism of the LME," said Oliver Bell, executive vice president of rolled products at Oslo, Norway-based Norsk Hydro ASA.
Aluminum premiums have hit record highs in the past couple of years, partly due to the long queues to access metal in LME-approved warehouses.
Rising dissatisfaction over the issue has spurred the LME to review its rules, and proposed changesscheduled for an LME board vote in Octoberhave already resulted in lower aluminum premiums.
There are other consequences, according to Nigel Steward, Rio Tinto Alcan senior vice president of technology and supply chain. "The decline in regional premiums is putting more pressure on our smelting business," he said. "The focus on costs is becoming more intense. ... Producers need to be in the first or second quartile of the cost curve in order to survive."
High-cost, low-margin aluminum producers could be forced to make cuts due to the lower income from premiums, which in turn could lift LME prices, the executives said.
The increased costs resulting from higher premiums have been a heavy burden for metal consumers, British can maker Rexam Plc said. "The LME consultation gives the industry the opportunity to discuss the costs that affect our business. Its difficult to hedge the premium cost," Rexam chief purchasing officer Alex Jennings said.
Aluminum consumers have claimed that the warehouse queues and higher premiums are costing them an extra $3 billion per year (amm.com, July 23).
Aluminum prices have fallen 40 percent since 2008 because a decline in LME tags havent been fully offset by a 45-percent rise in aluminum premiums, which make up a far smaller portion of the overall price.