Why Alcoa, Rusal's Interests on LME Aluminum Align

The world’s largest aluminum producer, Russia’s UC Rusal, matched calls made last week by Alcoa Inc. for the London Metal Exchange (LME) to release more detailed data on long and short positions as well as details of which parties are holding aluminum inventories.

“There is a need for greater transparency in the London Metal Exchange’s disclosure of commercial and non-commercial positions on the exchange,” Oleg Mukhamedshin, Rusal’s deputy chief executive is quoted as saying by Reuters.

In the US, the Commodity Futures Trading Commission (CFTC) requires the LME’s closest competitor, CMA, to release detailed positioning information. The data comes out as a weekly report, the Commitment of Traders, but the CMA does not run an aluminum contract and its copper contract features much lower volumes than the LME.

FREE Download: The Monthly MMI® Report – covering the Aluminum market.

Knowing the level of speculative positions is essential in a market where LME trading volumes last year in aluminum derivatives were more than 30 times higher than industrial demand for the metal, Rusal’s Mukhamedshin is quoted by Reuters as saying. “We also believe that transparency in reporting also needs to be applied to the reporting of warehouse stock by company in each LME warehouse location, as well as the category of owner of metal placed on warrant,” Mukhamedshin is quoted as saying.

So far the LME has only moved to increase load-out rates, hoping that would defuse the controversy around massive exit queues and the high physical premiums being charged for aluminum, a metal in global surplus. But that hasn’t been nearly enough.

Alcoa appears (from reported comments) to be in agreement with Rusal on the question of reporting positions and inventory transparency, but has gone further to suggest the physical premiums should formalized into regional premium contracts for four locations: the US Midwest, Rotterdam duty paid, Rotterdam duty unpaid, and CIF Japan.

Tim Reyes, Alcoa’s president of Materials Management, said that the growing spread between the LME price and premiums are the real problem, not the amount of time it takes to get material out of storage – a point we have made on previous occasions.

While satisfying a short-term public relations need, imposing this rules change (increasing load-out rates) will have serious short and long-term impacts – encouraging the movement of LME inventory to invisible, off-warrant inventory, increasing the call for regulation of the LME and undermining confidence in the HKEx, the LME’s new owners.

The stock and finance trade has tied up most of the estimated 10-15 million tons of excess aluminum stock globally and the premiums paid to attract money into such deals have distorted the market in recent years.

Finance deals involve a bank, trade house, or investment fund borrowing money cheaply, buying physical aluminum, selling it forward on the LME at a profit, while striking a warehouse deal to store it cheaply in the interim. The activity is largely out of the reach of regulators or the LME, but full transparency on deal-making would at least allow the market to see who was making the forward sales.

In spite of the threat to interest rates posed by an early end to taper relief, the trade has perversely become more profitable of late as the cash-to-3-month LME spread has widened slightly from $43.50/ton at the beginning of July to $48.00/ton now. Although activity is said to have dropped off as banks withdrew from commodities investments, a Reuters article suggests they will be back in the finance game if the numbers continue to hold up – after all, finance is what banks do.

Read more from Stuart Burns.

FREE Download: The Monthly MMI® Report – covering the Aluminum market.

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