According to a recent article discussing testimony given by consumers in the aluminum industry before a Senate subcommittee, global aluminum costs were inflated by $3 billion in the past year through “unfair LME rules,” according to Tim Weiner, global risk manager of MillerCoors. That San Francisco Chronicle article did not report on how MillerCoors arrived at that specific dollar amount.
Allow us to fill you in.
The $3 Billion Premium Paid by Consumers
$3 billion represents the price consumers have overpaid for aluminum. In our previous post, we discussed the delta between current Platts MW premiums and historical premiums.
The delta between the two represents $.07–.09/lb or $154–$198/mt. If you take a more conservative figure, say $120/t, and multiply it by the number of tons of primary production in the world outside China (~25 million metric tons by 2012 numbers), you come up with $3 billion – this endorses Weiner’s estimate.
Who actually gets that $3 billion?
Contrary to popular opinion, that money is not paid to Goldman Sachs or the warehouse operators. Instead, that money is paid (all or at least in part) to the primary aluminum producers. More detail on that in our infographic (left); click for a larger view.
What do semi-fabricated producers and consumers want to see happen? According to Nick Madden, senior VP and chief supply chain officer for Novelis, “We want the inflated premiums to go away.” The question becomes: How?
Madden discussed a number of initiatives taken by Novelis to work with the LME to try and change the rules, but Madden believes the LME remained resistant to change with the exception of some small tinkering here and there. The changes have come up short, according to Madden. At the end of the day, the solution likely lies with regulatory intervention.
“You should have regulations covering adjacent activities around derivatives markets… meanwhile, banks should not be allowed to own warehouses,” Madden said. “Banks are both brokers, financiers and warehouse operators with physical capability – the playing field is not level.”
The same is true for some of the physical trading companies that own warehouses (Pecorini/Glencore, for example – access to finance, metal and warehousing capability), giving them many levers, according to Madden.
The irony is that companies like Novelis deeply understand the role of traders, financiers, etc. But the warehousing piece goes one step too far.
If you missed the first part of this article, read it here.