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LME needs transparency: economist

Keywords: Tags  Jeffrey Harris, Syracuse University, CFTC, Commodity Futures Trading Commission, LME, London Metal Exchange, warehouse queues, aluminum Michael Cowden

CHICAGO — The 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 CFTC’s chief economist from 2007 to 2010 and is now the Dean’s Chair of Finance at Syracuse University.

"It’s a little bit different than the regular futures market where we are getting daily reports on who’s long and who’s 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 Britain’s 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 it’s a cross-border thing, it’s 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. That’s 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 LME’s proposal to boost load-out requirements (, 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 doesn’t have control over the aluminum delivery point?"

But contracts 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 doesn’t make it any less problematic," he said. "But from a regulatory standpoint ... how do you look at a market that on average looks like it’s OK but at specific points has bottlenecks?"

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