LME

The London Metal Exchange is treading cautiously in making rule changes to the way its warehouse system works.

Free Download: Latest Metal Price Trends in the June MMI Report

Part of the reason is to be found in that phrase, particularly “warehouse system.” Independent operators run the warehouses; they are licensed or approved by the LME but they are not owned by the exchange. In addition the warehouses are located in different continents, in multiple legal jurisdictions and changes permissible at one may be considered illegal in another.

Legal Challenges

To add further complication, the legal challenges to rule changes in the past have come from primary producers such as UC Rusal and end users such as MillerCoors and Coca-Cola. So, the LME moves cautiously. This week’s announcement of an industry-wide consultation is to review two proposed changes that the exchange hopes will both increase the decay of existing queues and prevent the build up of new ones.

aluminumingots_500

These aluminum ingots just want to leave Detroit an Vlissingen.

The first is to increase the minimum load-out rate warehouse operators are obliged to achieve, the minimum, as considered by some operators, is the maximum and they believe it is set far too low. For operators holding more than 900,000 metric tons of metal, they are currently loading out only 3,000 mt per day, yet the same warehouse will take IN tens of thousands of tons.

Load-Out Reform

The new minimum daily load-outs proposed for warehouses storing between 150,000 mt and more than 900,000 mt range between 2,000 mt and 4,000 mt a day, scaled according to the amount of metal stored. It’s hardly a transformational change as the two remaining warehouses with extended queues are still potentially out to a year on a 3,000 mt/day minimum.

According to Reuters the LME’s warehouse report shows queues to load out at Vlissingen, Netherlands, were 365 days in May and at Detroit were 387 days. With rents at these warehouses on average about 0.50/mt per day, that remains a massive financial burden for metal owners waiting in the queue. The change will do little to reduce delays in the short term.

Rent Capping

Of more significance is the move to cap rents for metal while it is in the queue. This is a suggestion we have long held as being the most practical to implement and the most effective to encourage early load out. If operators do not receive rent for metal in the queue, they will work to remove it as quickly as possible and replace it with metal they can earn rent on.

Specifically, the proposal reads warehouse companies that fail to deliver out-queued metal within 30 calendar days would be required to halve the maximum published rent charged to the affected metal owners. After 50 calendar days, no rent could be charged at all. It’s still a far cry from when I started in the trade and we could take physical delivery in 48 hours, but 30 days is better than 300.

So, some tough changes for the warehouse operators then? Well, no, not really. For one thing, 90% of LME warehouses do not exhibit any queues, so changes will not make any difference to them, and even for the two remaining problem locations — Detroit and Vlissingen — the changes are not going to be introduced before next May, by which time their queues will have decayed to no more than about 50 days based on current trends.

The changes will, however, inhibit the build up of new queues if the stock and finance trade roars back. For the time being, the physical delivery premiums have fallen back to “normal” levels and the market shows no signs of the shortages that could drive competition for metal, but the LME’s forward curve for aluminum does support the return of the stock and finance trade. The difference now compared to 2010-12 is the use of off-market rather than LME warehouses for the trade. Let’s hope the combination of rules and trade changes combine to avoid a repetition of queues in the future. The LME changes are a step in the right direction.

This September: SMU Steel Summit 2015

{ 0 comments }

My colleague, Jeff Yoders, referred last week to action taken by Alcoa, Inc. to challenge the Commodity Futures Trading Commission (CFTC) over its involvement in the London Metal Exchange’s (LME) upcoming rule changes.

Free Webinar: Are You Speculating When You Buy Spot Metals?

The LME is in the process of a long running review of it’s warehouse rules following industry criticism of the length of queues, particularly at it’s Detroit and Vlissingen (Netherlands) warehouses, a situation that was initially viewed as driving up physical delivery premiums. It has since been seen to be only part of a wider problem created by the stock and finance trade’s competition for physical metal.

Pile of aluminium bricks waiting for transport to the factory

Pile of aluminum ingots stuck in Detroit, even though its owners want to take delivery.

Queues have declined in nearly all locations but still remain at upward of a year in Detroit and Vlissingen, although Metro International and Pacorini, the warehouse operators at those locations, have taken steps to further limit intake while the LME’s deliberations are underway.

How Producers Benefit From Premiums

Alcoa, like UC Rusal and other producers, has benefited from the physical delivery premium on top of the LME quoted prices in recent years particularly as, at times, the LME price has been below the cost of production. The addition of the delivery premium has allowed Western smelters to break even and even post profits while achieving no more than the traditional LME price would have given them at a loss.

Currently, with falling LME prices and much-reduced physical delivery premiums even a combined all in price is below cost for many smelters, hence Alcoa’s concern that the LME’s rule changes are not drastic enough to precipitate further falls. The same worries were behind Rusal’s challenge to earlier proposed rule changes last year, a challenge that eventually failed in the English High Courts.

Alcoa’s action is, as you would expect, executed with more decorum and took the step of requesting information and records pertaining to the LME’s application to be a foreign board of trade according to a Metal Bulletin article and is said to have come after a leaked letter from the CFTC to the LME revealed that the regulator had deferred its review of the exchange’s application to register as a foreign board of trade while it evaluated the LME’s warehouse reforms.

What CFTC Wants

The LME needs CFTC approval to act as a foreign board of trade if it is to effectively operate in the US market, so the CFTC could be said to have the exchange over a barrel in terms of forcing them to accept CFTC suggestions or guidelines regarding rule changes. According to the article, the CFTC offered the exchange its “opinion” of the reforms, including that the possibility of capping or banning rents and inducements saying such reforms “show promise.”

Alcoa’s position is the CFTC has no authority to intervene in such a contentious issue and, as such, should refrain from getting involved, preferring an open dialogue with industry members (obviously meaning Alcoa among others) to arrive at solutions.

What Alcoa Wants

Alcoa is quoted as saying “We believe that the CFTC should refrain from any comment or judgment on, or interference with, LME rule changes, and that the CFTC should examine any LME aluminum contract performance issues only through an open, inclusive and transparent process where all affected market participants have the opportunity to present their views.”

You can see where Alcoa is coming from, but, surely, the CFTC also has a responsibility to consumers affected by rule changes and the impact they may have on prices. Consumers have been so damaged by the physical delivery premiums that they have attempted legal action to address the issue but without being able to gain any traction through the courts.

Market Distortion/Disruption

The physical delivery premium is a distortion in the market that serves no party well, it would be better for producers, consumers and the trade if aluminum prices could return to a more historic norm of an LME price plus a small delivery premium reflecting no more than the logistic cost for delivery. If the CFTC’s pressure on the LME helps achieve that it’s all well and good, whether they have the authority to use the LME’s license application as a means to achieve that, we will leave to the courts to decide.

Free Download: Latest Metal Price Trends in the June MMI Report

{ 0 comments }

Aluminum physical delivery premiums have collapsed this year.

Why Manufacturers Need to Ditch Purchase Price Variance

Asia has led the fall due to weakening regional demand and a flood of Chinese semi-finished products hitting the market. In part, some of this Chinese material is said to be destined for re-melting and, as such, is replacing primary ingot sales in the region but our belief is this is limited, as much by economics as anything.

Exchange Prices Nearing Parity

The Shanghai Futures Exchange metal price is not at such a discount to that of the London Metal Exchange to make the re-melting/reselling trade profitable.

To produce an extruded or rolled shape of any kind incurs a processing cost and, as such, any shape exports are going to be at a premium to SHFE primary metal. It is more likely that Chinese exports are simply replacing sales from regional extruders and rolling mills, reducing primary metal demand and leaving the area awash with primary inventory. As a result, premiums for new ingot sales have collapsed.

{ 0 comments }

The three-month aluminum price on the London Metal Exchange is back below $1,800/metric ton. In April, aluminum rallied with most industrial metals thanks to a weaker dollar. However, in May the dollar bounced back up, unwilling to give up more ground, hurting industrial metals.

Aluminum prices are now hanging near previous troughs. If the dollar continues to rally, we would expect aluminum prices to hit record lows this year.

Why Manufacturers Need to Ditch Purchase Price Variance

Same story with nickel, the metal rallied in April after hitting its lowest level in six years, but in May Nickel fell as well and now it’s near that record low. As with aluminum, a stronger dollar would put nickel prices into a tailspin.

{ 0 comments }

The London Metal Exchange (LME) yesterday launched a month-long consultation on proposals designed to broaden access to its electronic trading platform, LMEselect. The changes put forward include opening up LMEselect access to category 3 and category 4 (non-clearing) members of the exchange as well as adding flexibility to the criteria required to apply for LME membership.

Why Manufacturers Need to Ditch Purchase Price Variance

“Today’s proposals are crucial to our overarching aim to maximize liquidity and participation on the LME,” said Garry Jones, LME CEO. “Opening up access to trading on LMEselect is beneficial to everyone trading on any one of our venues as it will bring more liquidity and price transparency to all.”

Adding flexibility to the application criteria for LME membership means that prospective members may, in some cases, benefit from exemptions from the UK Financial Conduct Authority (FCA) authorization requirements, which represents a significant step in the LME’s Liquidity Roadmap. The changes would make the LME electronic market more attractive to non-UK based traders who want to take advantage of the Exchange’s enhanced liquidity initiatives but who are currently not eligible or are discouraged from applying by electronic access restrictions.

If the LME decides to proceed with the proposed changes after the consultation period ends, then full details of the category 4 membership requirements including fees and B share requirements will be published.

{ 0 comments }

The London Metal Exchange wants to grow its electronic trading marketplace. Executives at the world’s biggest and oldest market for industrial metals believe they can grow it quite rapidly if the right conditions are put in place. Paul MacGregor, the exchange’s head of sales, said at an LME event in Chicago that the group is in a position where it has a good electronic trading platform and good participation in it, but needs more volume.

Free Download: Cut Your Aluminum Shipping Costs

The Hong Kong Exchanges and Clearing, Ltd.-owned LME still uses open outcry trading. That system works great for actual metal users, but the professional traders and bank traders that the LME would like to have participating are used to a faster pace.

{ 0 comments }

LME Aluminum for three-month delivery has fallen back below the $1,800-per metric ton level from over $2,100 in the third quarter of last year. The prospect of a disorderly unwinding of the stock and financing trade, which, until recently, had locked up large amounts of aluminum in deals, is causing a chilling effect in the entire aluminum market.

Free Download: Shipping Cost Certainty for Overseas Aluminum Deals

Physical delivery premiums are also falling worldwide. Reuters reports that South Korea’s state stockpiler bought 2,000 mt of aluminum at a premium of $330/mt over LME cash.

{ 0 comments }

If you can put off buying your aluminum until next month you may get a lower price than right now.

Free Download: Cost Certainty for International Aluminum Purchases

That is what recent reports seem to be suggesting. We have written extensively on falling aluminum physical delivery premiums with the first chink in the producer’s armor showing in Europe this quarter and in negotiations for Q2 prices in Japan. As lower physical delivery premiums work their way through to product producers the price of extrusions and rolled products should ease during Q2. For the first time in years the physical delivery premium looks vulnerable.

{ 0 comments }

The London Metal Exchange continues to move forward with reform of its warehouse rules even if, for those unfamiliar with the situation, the reform appears to be going at a glacial pace.

Free Download: Secure Shipping Costs for International Trades

The challenge the 138 year old exchange faces is primarily one of trying to balance competition law across the 37 international locations in which it operates – what is legally enforceable in Baltimore may not be in Bremen or Busan. The LME has to move cautiously, give all parties the opportunity to discuss, review and agree to changes and, above all, try to avoid getting dragged into London’s High Court as Rusal so cynically did last year in an attempt to stall changes which it saw potentially damaging to the aluminum price.

Still in the cards are new rules to cap or ban rents for metal held up in exit queues, a move that, most agree, would result in a rapid deterioration of the load out queue as any incentive to keep the queue in place would evaporate the moment the rule change went into force. There is also discussion about capping the level of daily rents, possibly in recognition that millions of tons have been lost to the LME system as metal has flowed into non-LME warehouses under the stock and finance trade.

{ 0 comments }

Could this be the beginning of the end of overblown aluminum physical delivery premiums?

Free Download: Trading Large Quantities? Ensure Cost Certainty

Consumers certainly hope so, and although it’s long been predicted the sudden fall in European physical delivery premiums has taken the market by surprise. According to Reuters, premiums paid over the LME cash price were mostly quoted in a range of $385-$420 a metric ton for duty-paid material in Rotterdam, compared to premiums of $430-$480 just last week.

{ 0 comments }