UC Rusal Chief Executive Oleg Deripaska appealed to the new owners of the London Metal Exchange (LME), Hong Kong Exchanges and Clearing (HKEx), to think again on their proposals to force aluminum warehouses to release more metal than they take in, according to a recent Reuters article, saying “the intent of the HKEx to accelerate the transfer into the market of an additional 2 million tons of aluminum, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to.”
The firm is worried the proposed rule changes would release a tsunami of aluminum into the market, distorting the supply balance and precipitating even lower prices.
Strangely, it adds that the measures would lead to a less transparent marketplace – we’re not sure that’s possible, unless the metal that came out of LME warehouses went into private or off-market storage, in which case it would add to the estimated 5 million tons of metal sitting in medium-term storage deals and, yes, potentially creating even more uncertainty over who owns what and where.
Aluminum Price Outlook
If metal went directly into off-market storage, though, it would still have a depressing impact on prices. Potentially, position holders would rush for the exits in search of lower-priced storage deals, selling positions that may otherwise be rolled over.
Rusal’s call underlines how primary producers have benefited from the stock and finance model facilitated by the LME. Metal that otherwise would have flooded the market over recent years has quietly been stored away, creating a false (i.e. not consumed) demand for new production and propping up prices.
Yes, aluminum prices are lower than record highs in 2008, but so is every base metal; they would have been lower still but for the stock and finance game, and producers would not have benefited from the hefty (in some cases, life-saving) physical premiums the distorted market has caused.
Rusal reportedly appealed to the LME to seek other options, such as expanding the global network of storage locations, essentially finding a home for yet more excess metal, a suggestion that can be seen in the same light as the firm’s request to the Russian state to build up a strategic reserve of aluminum.
Ironically, more warehouses are on the HKEx strategic plan, particularly in China. Analyst Nic Brown at Natixis in London is quoted by Reuters as saying the HKEx wants to get approval from the Chinese government to open LME warehouses in China, but that Beijing will be reluctant if there are huge backlogs in the system.
“China is a market that HKEx knows it needs to capture in order for the purchase of the LME to make sense, so it will go ahead with these rules to get into the Chinese market,” we paraphrase his quote. “And if it’s detrimental to Rusal, that’s unfortunate, and for HKEx that damage is worth incurring in order to get warehouse access in mainland China.”
Future for Aluminum Supply Chain
So to what extent Mr. Derispaska’s complaints will be taken into account by the LME board remains to be seen. He has asked for next month’s decision, following the current review, to be postponed pending more industry consultation.
It seems just about everyone is unhappy with the proposals, consumers and producers alike, so watch this space.
Whatever decisions are taken will be implemented from April 1 next year; let’s hope for producers and consumers and the supply chain in between that the date doesn’t live up to its commonly known moniker of April Fools Day.