London Metal Exchange should be more transparent as it aims to
trim long queues for aluminum at warehouses in Detroit and the
Netherlands, according to a former chief economist for the U.S.
Commodity Futures Trading Commission (CFTC).
"I think one of the
issues with that entire (aluminum futures) market in particular
is there is not a lot of transparency," said Jeffrey Harris,
who was the CFTCs chief economist from 2007 to 2010 and
is now the Deans Chair of Finance at Syracuse
"Its a little
bit different than the regular futures market where we are
getting daily reports on whos long and whos short,"
Harris said during a presentation at a recent Metals Service
Center Institute conference in Palm Beach, Fla.
Another problem is the
international nature of the aluminum trade and the LME, Harris
said, noting that Britains Financial Conduct Authority,
the CFTC and other U.S. agencies are all looking into the issue
of long queues. "With the aluminum market in general, since
its a cross-border thing, its not necessarily
governed by CFTC authority," he said.
Current tensions are
largely between physical producers and consumers of aluminum
and the financial community, Harris said, estimating that up to
80 percent of stocks in LME-registered are locked up in
financing deals. Thats largely because futures prices
remain higher than spot prices while interest rates are low,
making financing deals both cheap and more lucrative than
traditional investments like Treasury bills, he said.
To get metal out of
warehouses, government agencies or the LME could impose
regulations, such as the LMEs proposal to boost load-out
requirements (amm.com, July 1), Harris said. Another
option would be to offer "economic carrots" that might attract
metal out of sheds, he said.
One example might be
regional futures contracts that would allow aluminum buyers to
choose a specific location for delivery, thereby addressing
what might be a "structural flaw" with the LME, Harris said.
"What we have is an aluminum market that is not necessarily set
up to deliver ... where you actually need the product," he
said. "What good, then, is an LME contract to a physical
aluminum buyer or seller who doesnt have control over the
aluminum delivery point?"
specifying delivery points offer both advantages and
disadvantages, Harris cautioned. During the 2008 financial
crisis, for example, the U.S. government had to encourage a
glut of petroleum products to be diverted to other locations
rather than their traditionally delivery point at Cushing,
Okla., he said.
Further clouding matters, backlogs are most pronounced at
only a handful of locations, such as Detroit, Harris said.
"That doesnt make it any less problematic," he said. "But
from a regulatory standpoint ... how do you look at a market
that on average looks like its OK but at specific points