LME plans ‘fall short’, say aluminium users

Group says reforms to bourse’s warehousing policy are inadequate, writes Josephine Mason

AGROUP of aluminium users — including SABMiller’s US joint venture, MillerCoors, and other makers of drink cans — have said the London Metal Exchange’s (LME’s) proposal to overhaul its controversial warehousing policy will “fall short” of solving the long waiting times and inflated prices.

In a letter dated Monday, the aluminium users group called on the exchange to implement even bigger changes, which they said would end long waiting times, increase transparency for physical pricing and restore user confidence in the exchange. Without that, there will be “more dysfunction, more manipulation and more harm”, the letter from the group said. It also asked for a meeting with the exchange.

The letter was in response to dramatic changes announced by the exchange on July 1, meant to soothe irate industrial users who say the exchange’s warehousing policy has led to record high physical premiums for aluminium and long waits for delivery.

While some of the group’s suggestions may be hard to enforce, the seven-page letter will likely increase pressure on the exchange and its new owner, Hong Kong Exchanges and Clearing, to deal with the problem as regulatory, legal and political scrutiny of the exchange intensifies. Several changes that called for greater regulation and increased transparency at the exchange also underscored prolonged criticism among some industrial users and traders about how the 136-year old exchange is run.

Some consumers say a lack of regulation in the US and UK is partly to blame for the problem they are facing.

“We encourage the LME to work towards a co-ordinated regulatory framework across coun- tries and regions,” the aluminium users said. “This will help guard against manipulation of LME rules and ensure a fair and open marketplace for metal.”

In July, MillerCoors, the secondlargest brewer in the US, raised the issue in a hearing at the US Senate banking committee, saying high physical prices have cost US consumers an extra $3bn a year in expenses.

Alongside Goldman Sachs and other banks and traders that now

Changes we seek are simple and straightforward

own many of the world’s biggest warehousing companies, the exchange faces several class action lawsuits alleging “anti-competitive behaviour” in aluminium warehousing. US and UK regulators are also investigating the issue.

At the heart of the issue are several companies with warehouses registered by the exchange, including Glencore-owned Pacorini, Trafigura’s NEMS and Goldman Sachs’ Metro. These companies have found a lucrative business in building up big stocks, charging rent for storage, and delivering metal out of storage only at a limited rate.

In its third effort to resolve the problem in as many years, the exchange has proposed linking the rate at which a warehouse, with big stockpiles and long wait times of more than 100 days, is required to load out material to the rate at which it brings in new metal.

In Monday’s letter, the group called on the exchange to rein in “exceptional” incentive payments made by warehouses to attract metal, and limit charges for moving metal in and out of storage sheds.

Among other changes aimed at improving transparency, it said the exchange should have more balanced representation on its committees, provide more information about its auditing of warehouses and enforce firewalls between own- ers of warehouses and merchants to prevent conflicts of interest, the group said in the letter.

In highlighting flaws in the new plan, it said the maximum waiting time of 100 days set by the new rules was still too long and the rules could lead a warehouse to refuse to take delivery of new metal or shift metal to non-LME registered facilities. The deadline for submitting comments on the exchange’s plan is September 30. Warehousing companies and trading firms have also given their feedback on the plan, sources have said.

Some of the users’ suggestions may be difficult for the exchange to implement. Any move to limit rent increases would be deemed as price fixing by the European Union and therefore anti-competitive, the exchange has said.

A final decision on whether to implement the changes is expected to be made at a scheduled LME board of directors meeting next month and if approved, the new rules would come into force on April 1 next year.

“The changes we seek are simple and straightforward and would ultimately result in the LME operating like other commodity exchanges around the world,” said the Beer Institute, which represents brewers and beer importers who are part of the user group.